Tesla Motors Case Study

Corporate Finance

SS 2014

Case Study : “Tesla Motors”

by

Univ. Prof. Dr. D. Hess

Universität zu Köln

Maite Barreneche                        Matrikelnummer :

Mónica Cabello Mera                 Matrikelnummer : 5760380

Irene García Cutillas                Matrikelnummer : 5758718

Fernanda Sottil De Aguinaga        Matrikelnummer : 5760828

TABLE OF CONTENTS

1. Tesla´s business model                                                                3
2. Percentage of sales method                                                                4
3. Valuation                                                                                5

1. Growth rate determination for the terminal value period                        6
2. Payout determination for the terminal value period                                6
3. Market risk premium and risk free rate determination                        6
4. Equity beta determination                                                        6
5. Required rate of return determination                                        7
6. Flow to Equity                                                                8
7. Company valuation                                                                8

1. Robustness check                                                                        8
2. Reflection

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1. Tesla’s business model

Tesla Motors Inc. is a company that focuses on designing, developing and manufacturing fully electric cars and advanced electric vehicle powertrain components. The enterprise also provides development services for the powertrain systems and components it produces by selling them afterwards to other automotive manufacturers. Among the products Tesla offers the market are the sedan Model S, the Tesla Roadster sports car, the Model X minivan and other stationary energy storage products the company has developed.

Because of environmental consciousness, the impact of rising oil and gasoline prices, the new government regulations and the shifting consumer needs, the electric-based vehicle industry is intense and evolving. Tesla Motors is facing a strong competition nowadays and expects to deal with even a stronger one in the future. The company finds itself to be placed in an unfavourable market position regarding its competitors, who all present significantly greater financial, technical, manufacturing and marketing resources; this mainly due to a longer operation history and existing reputation.

Nevertheless, the company believes to have an important competitive advantage in the industry. Tesla possesses particular vehicles, electric vehicle engineering expertise, innovative manufacturing and an efficient operational structure that allows it to offer an attractive list price to the customers. Tesla’s products have also particular characteristics that contribute positively to a market differentiation. For instance, the vehicles are historically known to have a long range and recharging flexibility, they are also energy efficient and can achieve a high-performance without compromising design or functionality.

Regarding the company’s supply chain, Tesla conduces the powertrain and vehicle manufacturing and assembly operations at the Tesla Factory in California and in Tilburg, Netherlands. To guarantee an efficient and seamless process, the company obtains many components from a single reliable and qualified source. Moreover, because the company seeks to control inventory costs, warranty serving, product pricing and customer feedback, it owns its distribution channels of stores and galleries.

Through important marketing channels the management seeks to encourage Tesla’s market awareness, this increasing the customer’s demand and therefore generating a growth impact in the sales division, particularly in Europe (United Kingdom) and Asia (Japan, Hong Kong and Australia). The company knows that in order to sustain a long-term growth, it needs to design, build and achieve a market acceptance of new models; however Tesla Motor’s success will always be dependent upon customers’ willingness to adopt these electric vehicles.

Tesla Motors has studied important risk factors that could further damage its performance causing the company to incur in unforeseen liabilities. Some of these uncertainties are concerning the supplier’s timing, reliability and possible failure rates affecting the whole production chain. The existence of alternative fuel vehicles, the instability of gasoline and oil prices and the current political and economical regulations can also affect the customer’s adoption of Tesla’s products. The company states that a decrease in its stock price could be possible if Tesla’s management team fails to forecast the coming trends accurately.

In order to measure how efficiently Tesla Motors uses its assets and manages its operations in terms of profitability the PM, ROA and ROE ratios were computed for the years 2009-2013^[1]. The company has impressively increased its sales in the past year, this leading to a higher income, however due to the high COGS (cost of revenues) and operating expenses it has failed to turn the final losses (net income) into profit. This is also reflected in the ROA and ROE ratios; nevertheless the impact of the increasing income isn’t as strongly observed because of the increasing assets and equity needed to support the sales growth.