Tesla Motors, Inc. Financial Analysis Essay
Tesla Motors, Inc. was founded in early 2003 by a group of Silicon Valley engineers, incorporated in Delaware on July 1 of the same year, and is now headquartered in Palo Alto, California (â€œTesla- Investorâ€). The company designs, develops and manufactures electric vehicles and electric vehicle powertrain components. Tesla also provides the same services and powertrain components to other manufacturers of electric vehicles (Analysts Corner 2). Tesla Motors is best known for producing the Tesla Roadster, an all electric sports car released in 2008, with outstanding performance results (â€œAbout Teslaâ€).
Tesla has developed a unique marketing plan that differs from the traditional automotive industry by marketing and selling its products over the internet and through a global network of 32 stores that are owned and operated by Tesla. The company has 2,964 employees and has electric vehicles on the road in 37 countries around the globe (â€œAbout Teslaâ€; Analysts Corner 2).
On June 29, 2010 Tesla Motors Inc. became the first American car company to go public since the Ford Motor Company in 1956. The company offered 11.8 million shares priced at $1 above the initial offering at $17. The IPO was so successful that Tesla offered an additional 20% equity in the company by increasing the offering to $13.3 million shares to meet demand. The company raised a total of $226 million, the stock price soaring up 41% to $25 a share on opening day (Andrejczak). Today, Tesla Motors Inc. (TSLA) is traded on the NASDAQ stock exchange at a price of more than $180 a share. The stock has grown over 800% since its IPO and now Tesla has a market capitalization of over $22 billion. This impressive increase in stock price may come as a surprise to many investors due to the companyâ€™s earnings, or lack thereof. Given the current economic conditions, the relatively new market and existing competition; the Tesla stock price is grossly overvalued.
Tesla produces an outstanding product with an outstanding price tag. The new Tesla S was designed to compete in the luxury sports car arena along with BMW, Mercedes and Audi. Tesla has estimated that 21,000 Model S will roll out of its production facility in 2013 at a sticker price between $70,000 and $100,000 (Seetharaman; Finger). This year, Mercedes will sell 25,000 luxury sedans in that price range to U.S. consumers and BMW just slightly less than Mercedes (Finger). Tesla has estimated it will produce 40,000 Model S next year, almost twice the number of BMWâ€™s sold in that price range. In the post recessionary economic climate of 2013, there is not a strong demand for vehicles in this price range, even with the $7500 tax credit offered to consumers. The Tesla Model S is still out of reach for most Americans.
There are more reasonably priced alternatives in the EV market such as the Nissan Leaf and the Chevy Volt, but sales have been sluggish (Stammers; Alpert). General Motors recently â€œannounced a $5,000 formal price cut for the Chevrolet Volt plug-in hybridâ€ and Chrysler has opted to stay out of the EV market until â€œdragged there by consumersâ€ (Buss). Since the key to the future profitability of Tesla Motors is in the mass production of an affordable EV, demand for the product becomes paramount. As Dale Buss, an automotive industry journalist explains; Itâ€™s one thing for Tesla to sell nearly 1,500 Model S a month at about $70,000 apiece in the U.S. market these days; when Elon Muskâ€™s startup attempts to penetrate the lower part of the EV market with its own model, success will be a lot harder to come by.
(Buss) Tesla intends to meet that challenge with the 2016 release of the Gen. III., a Tesla EV with the range of a Model S, but half the price. The 200 mile range of a Tesla EV is what gives it a competitive advantage over other more affordable EVs, but at the cost of additional batteries (Alpert). The added cost of the batteries makes the target price next to impossible to reach, but necessary in order to avoid the fate of other affordable EVs, such as the Volt. So, rather than realize their goal â€to accelerate the worldâ€™s transition to electric mobility with a full range of increasingly affordable electric carsâ€(â€œTesla Improvesâ€), Tesla Motors is â€œhelping create a highly bifurcated segment where only expensive EVs can achieve a feasible volumeâ€ while pushing affordable EVs and its own profitable future further out of reach (Buss).
Tesla Motors CEO, Elon Musk, maintains that there is still adequate demand for the Model S and that the company has received 10,000 orders in North America alone. The truth of the matter is that the true demand for EVs remains to be seen. In May of 2013, Tesla shocked analysts when it â€œstopped disclosing its end-of-quarter order backlog which might have shed light on the issue after previously trumpeting a 15,000-unit reservation listâ€ (Alpert). Many of Teslaâ€™s orders were cancelled due to the companyâ€™s price increases on options for the Model S, which added an average 8%-9% to the overall price and stirred up numerous customer complaints on the Tesla website blog (Finger; Blanco). Many consumers are interested in reducing CO2 and reducing our dependence on fossil fuels, but simply cannot afford the more expensive alternatives.
In an attempt to make Tesla vehicles more affordable and increase sales; Tesla Motors has partnered with U.S. Bank and Wells Fargo Bank to provide financing to qualified Model S customers that includes longer terms, lower payments and the Tesla resale guarantee. â€œBuying a Model S through the Tesla financing offering now comes with a guarantee that the resale value will be higher than that of BMW, Audi, Mercedes, Lexus or Jaguarâ€ (â€œTesla Improvesâ€).
The guarantee is personally backed by the CEO of Tesla Motors â€œto give owners complete peace of mind about the long term value of the productâ€ (â€œTesla Improvesâ€). Elon Musk, Teslaâ€™s chief executive described the financing program during an interview; If our car was chiefly available for purchase and not by financing, I think thats maybe accessible to roughly 1 million US households. A financed product with the right financing-fully optimized financing, I think its probably accessible to the top 10 million households. (Seetharaman)
Musk went on to report that since the finance program was implemented, the company has experienced â€œa meaningful increase in demandâ€ that he estimates to be about 30,000 cars a year in North America (Seetharaman). There is little doubt that the Tesla financing program has boosted sales. â€œIn the second quarter 30 percent of sales fell into this categoryâ€ (Finger). Amazingly, against generally accepted accounting principles (GAAP), Tesla records the entire amount of the payment it receives from the bank asÂ revenue. The bank pays the full amount of the car price to Tesla, but after the 3 year lease agreement ends, Tesla pays the outstanding balance of around $46,000 when it takes the car back as part of the buy-back guarantee.
According to GAAP, the $46,000 would be a debt until the bank has been paid. This method of recording debt as revenue makes Tesla look more appealing on the books. Meanwhile, Tesla builds up an expensive and costly inventory of used Model S sedans as it works hard to convince consumers that the model S should be replaced, which effectively lowers the value of their own used inventory. The buy back guarantee has the potential to become a serious liability for the new car company.
In an effort to promote the use of cleaner technology and improve the air quality in the state of California, law makers there have implemented a program whereby automobile producers can earn credits for every zero-emission-vehicle (ZEV) and partial-zero-emission-vehicle (PZEV) brought to or sold in the state. Manufacturers can only sell a certain amount of vehicles that donâ€™t fall into this category. The manufacturers then have the option to purchase more credits from other companies in order to continue selling vehicles in California. Tesla earns credit every time the company sells a Model S and these credits are sold to competitors.
It has been estimated that for every Model S sold, Tesla receives between $25,000 to $35,000 worth of these credits and could contribute about $188 million in revenue for 2013 (Isidore). This year Tesla Motors Inc. reported its first profit in the first quarter and â€œbetter than projected earningsâ€ for the second quarter (Isidore). A closer look at the source of that revenue reveals that it did not come from sales of vehicles, but actually from the selling of zero-emissions-credits. Tesla sold a total of $68 million worth of the credits, 12% of its total revenue in the first quarter (Oâ€™Brien). Despite the source of the income, Tesla Motors stock price rose 17% when the quarterly report was released (Seetharaman).
Another contributing factor to the run-away stock price is that historically Tesla stock has been a favorite amongst investors for shorting. One analyst at Barronâ€™s reported that as much as 45% of Tesla outstanding shares were shorted until the first quarter earnings were released (Oâ€™Brien). When theÂ stock began its climb, the short sellers were forced to buy back at higher prices than they had hoped to, which effectively drove the market price higher. Investors also responded favorably to the news that the Model S won The Car and Driver Magazineâ€™s Car of the Year for 2013 and again when the Model S earned the highest score ever given to an automobile by Consumerâ€™s Reports (Oâ€™Brien, Finger). The forward price earnings ratio for Tesla Motors is in the neighborhood of 170. A high price-earnings ratio suggests that investors are expecting future growth and earnings. An exceptionally high P/E is indicative of a speculative bubble and overvaluation.
Market Capitalization for Tesla Motors Inc. has doubled within the last couple months and is now over $22 billion. The value of an enterprise for profit is dependent on what it can produce or profit from moving forward into the future, and in doing so increase the wealth of the ownership. Tesla Motors will produce roughly 20,000 cars this year and plans on doubling that output for 2014. That makes every car Tesla produced this year worth $1.1 million of stock. Compare that number to â€œluxury automaker BMW that has a market cap of$52.79 billion on global sales of 1.85 million cars or $28.53 thousand per car.
Mercedes Benz produces cars at $43.4 thousand per car using the same calculation (Finger). Tesla will have to produce hundreds of thousands of vehicles tosupport a stock price even half of what it is currently