This document analyzes Tesla and provides a target stock price of $216 per share, an 18.9% discount from the current market price of $256.76. Through discounted cash flow and multiples valuations, the group recommends selling Tesla stock. The summary provides an overview of Tesla's business, products, financial projections, and risks including competition from established automakers and dependence on suppliers. The target price is sensitive to revenue growth and discount rate assumptions.

1. TESLA VALUATION
MFIN 823 GROUP RESEARCH PROJECT
GROUP 7
Mark Moskvitine
Liya Pan
Badri Varadarajan
Chen Zhou

2. OVERVIEW
MARKET PRICE: $256.76/share*
2
TARGET PRICE: $216/share
RECOMMENDATION: SELL
* As of Aug 19, 2014

3. BUSINESS
- Incorporated in 2003, went public in 2010 (last US
car-maker IPO was Ford)
- Designs, develops and manufactures fully-electric cars
and powertrain components for vehicles
- Tesla Roadster, first produced in 2008, was the first
vehicle to use Lithium-Ion cell
TESLA ROADSTER
3
TARGET PRICE: $216

4. BUSINESS
- Other models include:
- MODEL S (sedan)
- MODEL X (SUV crossover to launch in 2015)
- GEN III (high-volume car to launch in 2017)
- Tesla acts as OEM for other car-makers
(strategic alliances with Daimler and Toyota)
- No dealerships; sells cars directly
- Plans huge investments in partnership with
Panasonic (Li-Ion batteries)
4
TESLA MODEL S
TARGET PRICE: $216

5. INDUSTRY
- Major players include: Nissan, GM, Tesla, Mitsubishi, Renault and Toyota
- Electric car market in its early state, but growing; represents only a small
fraction of the overall auto market
- Electric cars are further classified into:
- Hybrid electric cars
- Plug-in hybrid electric cars
- Battery electric cars
5
TESLA MODEL S
TARGET PRICE: $216

6. INDUSTRY
- Some of key drivers of growth will be:
- Gov’t support and subsidies
- Increase in fossil fuel prices
- Improved battery technology
- Increased trends towards sustainable development
- Lower operating and maintenance cost
6
TARGET PRICE: $216

7. INDUSTRY
- Some of key challenges will be:
- High purchasing cost
- Limited driving range
- Absence of developed recharging infrastructure
- Real/perceived reliability and safety concerns
- Reducing battery cost
7
TARGET PRICE: $216

8. SALES PRICE
- MODEL S: 2013 average price of $86,700
($85,000 + 2% options)
- MODEL X: 2015 estimated starting price of
$76,800 ($71,090 MODEL S starting price +
8% SUV premium)
- GEN III: 2017 estimated starting price of
$35,000
- Prices will increase with inflation
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
2014 2015 2016 2017 2018
Model S Sales Price Model X Sales Price Gen III Sales Price
8
TARGET PRICE: $216

9. SALES VOLUME
- TESLA sales expected to converge to 30% per annum, versus 20%
compound global EV sales growth
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2014 2015 2016 2017 2018
Model S Sales Volume Growth
Model X Sales Volume Growth
Gen III Sales Volume Growth
9
TARGET PRICE: $216

10. SALES VOLUME
- 20,000 units: Initial annual target production for MODEL X
- 25,000 units: Estimated initial annual sales for GEN III
0
20
40
60
80
100
120
140
2014 2015 2016 2017 2018
Model S Units per
year
Model X Units per
year
10
TARGET PRICE: $216

11. WORKING CAPITAL
- Days in A/P, A/R, Inv. expected to converge to competitor (BMW,
Daimler) averages from 2014 to 2018
Days In 2013A 2014E 2015E 2016E 2017E 2018E BMW, DAI Average
A/R (days) 8.9 10.4 12.2 14.2 16.6 19.4 15.45
Inv. (days) 79.8 78.1 76.5 74.9 73.3 71.7 72.07
A/P (days) 71.2 65.0 59.4 54.2 49.5 45.2 45.05
11
TARGET PRICE: $216

12. GROSS MARGIN
- 27.2%: estimated gross margin for 2014
(TESLA Financial Report)
- 47.5%: estimated steady state gross margin
(Musk’s goal for exceeding Porsche’s gross
margin)
- YoY Growth Rate: 20% except for 2015 and
2017
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
2014 2015 2016 2017 2018
Gross Margin
12
TARGET PRICE: $216

13. VALUATION
- $256.76/share: TSLA market share price as of Aug 19, 2014
- $216/share: Our price is a 50/50 blend of multiples-based analysis
($159/share) and DCF valuation ($273/share)
- 18.9%: discount from the current market price
13
TARGET PRICE: $216

14. VALUATION
- DCF method:
- 5-year high growth CF determined by projected Net Income
- steady state growth terminal CF determined by EV/EBITDA Multiple
of 9.41x (2013 average of BMW and Daimler)
- FCFF discounted by WACC of 10.93%
- Multiples method: based on 2013 average ratios for comparable car
makers (luxury/high-growth)
- P/E (10.99x, $395/share): most commonly used
- P/S (0.96x, $138/share): used for negative NI, hard to manipulate
14
TARGET PRICE: $216

15. FINANCIAL ANALYSIS
- SG&A/Sales Ratio: Very high in 2011 at 51% and 2012 at 36.4% due to
operating inefficiency
- Improved in 2013 to 14.2% with economies of scale
- Expected to improve further with increased sales of MODEL S and launch of
MODEL X in 2015 and GEN III in 2017
- 14.2%: SG&A/Sales used in forecasts as a conservative estimate
15
TARGET PRICE: $216

16. FINANCIAL ANALYSIS
- $850m: average CAPEX management estimate for 2014
- $667m/year: TESLA’s expenditures related to Gigafactory
- $106m/year: maintenance/replacement CAPEX equalling Depreciation from
2016 onward
- New CAPEX is depreciated at the 2012/2013 weighted asset-class rate of
10.5%
16
TARGET PRICE: $216

17. FINANCIAL ANALYSIS
- Income tax rate across profitable Auto & Truck firms is 28.35%
- Tesla’s rate is estimated to be 24% due to incentives for clean energy
initiatives
- $1.13bn: operating loss carry-forward available for future income tax
offsetting
17
TARGET PRICE: $216

18. RISKS TO PRICE TARGET
- Price target is sensitive to our projected revenue growth
- Price target is sensitive to our chosen discount rate
-10% Growth Rate +10% Growth RateDefault Rate
$216/share$190/share $248/share
+1% to WACC -1% to WACCDefault WACC
$216/share$206/share $226/share
18
+32-26
-10 +10
TARGET PRICE: $216

19. INVESTMENT RISKS
- 40% of Tesla’s long-term growth is expected to come from Asia
- Chinese consumers have a strong preference for established luxury
brands such as BMW, Audi, and Mercedes.
- Even at $35,000 GEN III will not differ significantly from entry-level
BMW models
19
TARGET PRICE: $216

20. INVESTMENT RISKS
- Infrastructure development remains a limiting factor for Tesla’s
growth
- Tesla could face very serious competition in the long term as ZEV
are produced by well-established luxury brands
- Tesla’s is dependent on outside suppliers, many of whom are
single-source
20
TARGET PRICE: $216

21. CONCLUSION
- Despite early success Tesla has a long way to go towards the
mainstream acceptance
- As a technology company Tesla may have a bright future, but as a
car manufacturer it will face serious competition
- Promising technology and industry do not necessarily imply a
long-lasting competitive advantage and positive abnormal returns
for an individual company
21
TARGET PRICE: $216

22. QUESTIONS
GROUP 7
Mark Moskvitine
Liya Pan
Badri Varadarajan
Chen Zhou
22
TARGET PRICE: $216