Tesla (NASDAQ: TSLA)
Business Valuation and Analysis
ACCT5910
Term 1, 2023
A.B. Jackson (ACCT5910) TESLA T1, 2023 1 / 72
Outline
1 Overview
2 Strategy
3 Accounting Analysis
4 Financial Analysis
5 Forecasting
6 Valuation
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Overview
WEEK 3:
OVERVIEW
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Overview
3.1: History
Tesla, Inc. (formerly known as Tesla Motors) is a California-based electric vehicle and clean
energy company that was founded in 2003 by Elon Musk, Marc Tarpenning, Martin Eberhard,
JB Straubel, and Ian Wright. The company is named after Nikola Tesla, a Serbian-American
inventor, electrical engineer, and physicist who is widely recognized for his contributions to the
design of the modern alternating current (AC) electricity supply system.
Initially, Tesla began by producing electric sports cars, starting with the Tesla Roadster in 2008.
The company then expanded its product line to include the Model S luxury sedan, the Model X
SUV, the Model 3 mid-size sedan, and the Model Y compact crossover SUV. Tesla has also
released the Cybertruck, an electric pickup truck, and the Tesla Semi, an electric truck designed
for commercial use.
Aside from its electric vehicle business, Tesla has also been involved in the development and
production of renewable energy solutions such as solar panels, energy storage systems, and solar
roofs. The company acquired SolarCity, a solar panel installation company, in 2016.
Over the years, Tesla has experienced both successes and challenges. Despite facing financial
difficulties in its early years, the company has since become one of the most valuable car
companies in the world, with a market capitalization of over $800 billion as of early 2022. Tesla
has also played a significant role in popularizing electric vehicles and accelerating the transition
to a sustainable energy future.
Source: ChatGPT
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Overview
3.1: History
Eberhard said he wanted to build “a car manufacturer that is also a
technology company”, with its core technologies as “the battery, the
computer software, and the proprietary motor”.
In February 2004, the company raised $7.5 million, including $6.5
million from Elon Musk. Musk became the chairman of the board of
directors and the largest shareholder of Tesla. A lawsuit settlement
agreed to by Eberhard and Tesla in September 2009 allows all five
Eberhard, Tarpenning, Wright, Musk, and J.B. Straubel (Chief
Technical Officer from May 2004) to call themselves co-founders.
By January 2009, Tesla had raised $187 million and delivered 147
cars. Musk had contributed $70 million of his own money to the
company.
In April 2015, Tesla entered the energy storage market, unveiling its
Tesla Powerwall (home) and Tesla Powerpack (business) battery
packs. The company received orders valued at $800 million within a
week of the unveiling.
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Overview
3.1 History
Controversies
Workplace safety concerns
Racism and sexual harassment in the workplace
The Wall Street Journal reported in October 2018 that the
Department of Justice (DOJ) was investigating whether Tesla misled
investors about Model 3 production.
“Full Self Driving” recall
Elon Musk’s conservatism hurting sales?
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Overview
3.2: Industry
GICS Sector 25 Consumer Discretionary
GICS Industry Group 2510 Automobiles & Components
GICS Industry 251020 Automobiles
GICS Sub-Industry 25102010 Automobile Manufacturers
NAICS
31 Manufacturing
336 Transportation Equipment and Manufacturing
3361 Motor Vehicle Manufacturing
33611 Automobile and Light Duty Motor Vehicle Manufacturing
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Overview
3.2: Industry
SIC
D Manufacturing
37 Transportation Equipment
573 Motor Vehicles And Motor Vehicle Equipment
5731 Motor Vehicles and Passenger Car Bodies
RBICS
20 Consumer Cyclicals
2020 Consumer Vehicles and Parts
202010 Consumer Vehicles and Parts
20201015 Consumer Vehicle Manufacturing
2020101510 Car Manufacturers
202010151020 Alternative Energy Car Manufacturers
FactSet
1400 Consumer Durables
1405 Motor Vehicles
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Overview
3.3: Main Products in the Industry
United States / Consumer Durables
FactSet Industry Index Weight No. Constituents
1405 Motor Vehicles 73.39% 24
1410 Automotive Aftermarket 2.31% 5
1415 Homebuilding 12.30% 23
1420 Home Furnishings 2.13% 15
1425 Electronics/Appliances 2.01% 8
1430 Tools & Hardware 2.46 2
1435 Recreational Products 4.82% 20
1445 Other Consumer Specialties 0.59% 3
https://my.apps.factset.com/navigator/company-security/constituents/FS1400US
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Overview
3.3: Main Products in the Industry
United States / Motor Vehicles
Name Symbol Index Weight
Rivian Automotive, Inc. RIVN-US 2.03
TuSimple Holdings, Inc. TSP-US 0.05
Gogoro Inc. GGR-US 0.13
Hyzon Motors Inc. HYZN-US 0.04
Proterra Inc. PTRA-US 0.12
Lion Electric Company LEV-US 0.06
Lucid Group, Inc. LCID-US 1.84
Faraday Future Intelligent Electric, Inc. FFIE-US 0.04
NWTN Inc. NWTN-US 0.37
Arrival SA ARVL-US 0.02
Canoo Inc. GOEV-US 0.04
Lordstown Motors Corp. RIDE-US 0.03
Fisker Inc FSR-US 0.13
Nikola Corporation NKLA-US 0.15
Blue Bird Corporation BLBD-US 0.08
Kandi Technologies Group, Inc. KNDI-US 0.02
Tesla Inc TSLA-US 80.05
Workhorse Group Inc. WKHS-US 0.04
REV Group, Inc. REVG-US 0.09
General Motors Company GM-US 7.02
Oshkosh Corp OSK-US 0.75
Ford Motor Company F-US 5.98
Miller Industries, Inc. MLR-US 0.04
Harley-Davidson, Inc. HOG-US 0.88
https://my.apps.factset.com/navigator/company-security/constituents/FI1405US
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Overview
3.4: Tesla Products
Electric Vehicles
Maintanence and Repair Services
Used Car Dealers
Powertrain Manufacturing
Industrial Equipment Leasing Services
Other Leasing Services
Backup, Emergencey and Standby Power Products
Mixed Heavy-Duty and High-End Batteries Makers
Heavy-Duty Industrial Batteries Manufacturing
Electric Vehicle Batteries Manufacturing
Battery Charging Equipment Manufacturing
Fuel Cell Equipment and Technology Providers
Photovoltaic and Solar Cells and Systems Providers
Autonomous Commercial/Transit Vehicle Production
Conventional Autonomous Transit Vehicles Makers
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Overview
Tesla Rivals
Company Headquarter Selection of EV models Features/characteristics
BMW Munich, Germany BMW i3, i8 Sustainable interior
BMW Mini Electric Special leasing/rental offers
BYD Xi’an, China BYD e5, e6 Domestic market focus
BYD Qin, Tang Lower prices
General Motors Michigan, US Bolt EV Futuristic projects
E100/200 Lower price compared to Tesla
in >200 miles better range
NIO Shanghai, China eT5 and eT7 Battery-as-a-Service
ec6 Availability of rescue can
es6 and es8 service with integrated chargers
Nissan Yokohama, Japan Nissan Leaf, E-NV200 Advanced dedicated IT systems
Ranault Boulogne-Billancourt, Kangoo Z.E, Megane E-Tech Perfect vehicle for carsharing
France Twizy, ZOE
Tesla California, US Tesla Model S Supercharger infrastructure
Tesla Model 3 Cost-free-charging
Tesla Model X, Y Over-the-air software updates
Volkswagen Wolfsburg, Germany E-up!, E-Golf US$100 billion EV standing until 2026
ID.3 Reliable battery supply chains
Source: https://tridenstechnology.com/electric-car-sales-statistics/
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Overview
3.4 RBICS Revenue
Revenue Exposure by Sector/Industry
Consumer Cyclicals: 92.16%
Finance: 3.69%
Industrials: 4.14%
Herfindahl-Hirchman Index – diversification in revenues
HHI =
N∑
i=1
s2i
= 0.92162 + 0.03692 + 0.04142
= 0.8524
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Overview
3.5: Performance
2020 2021 2022
Revenues
Sales 31,536m 53,823m 81,462m
Expenses
Cost of Goods Sold 24,906m 40,217m 60,609m
SG&A 4,636m 7,110m 7,021m
NPAT 690m 5,524m 12,583m
Cash Flows from Operations 5,943m 11,497m 14,724m
Cash Flows from Investment -3,108m -7,866m -12,018m
Cash Flows from Financing 9,949m -5,205m -3,482m
Net Increase in Cash 13,118m -1,757m -1,220m
Source: FactSet Standardized Financials
Note: 2020 was the first year that Tesla reported a positive net profit.
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Strategy
WEEK 4:
STRATEGY ANALYSIS
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Strategy
4.1 Five Forces
a. Rivalry among existing firms
b. Threat of new entrants
c. Threat of substitute products
d. Bargaining power of buyers
e. Bargaining power of suppliers
Using ‘electric vehicles’ as the identification of industry.
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Strategy
4.1 Five Forces
Rivalry Among Existing Firms
The electric vehicle industry is becoming increasingly competitive, with
many established automakers and new entrants entering the market. The
industry is dominated by a few major players such as Tesla and Toyota,
but there are many smaller players as well. Competition is fierce in terms
of technological innovation, production efficiency, and pricing, which can
make it challenging for new entrants to gain a foothold.
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Strategy
4.1 Five Forces
Threat of New Entrants
The electric vehicle industry has a relatively low barrier to entry in terms
of manufacturing, as there are many established automakers that could
potentially enter the market. However, the high cost of developing new
technology, such as batteries and power electronics, acts as a significant
barrier to entry. Additionally, the economies of scale and network effects
enjoyed by established players such as Tesla and Toyota make it
challenging for new entrants to compete effectively.
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Strategy
4.1 Five Forces
Threat of Substitute Products
The threat of substitutes for electric vehicles is relatively low, as internal
combustion engines are becoming increasingly unpopular due to
environmental concerns and emissions regulations. However, hybrid
vehicles and other alternative fuel technologies could potentially provide
substitutes for electric vehicles in the future.
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Strategy
4.1 Five Forces
Bargaining Power
Suppliers
The electric vehicle industry relies heavily on a limited number of
suppliers for key components, such as batteries and electric motors.
This gives suppliers a relatively high degree of bargaining power over
manufacturers, which can impact pricing and supply chain efficiency.
However, manufacturers such as Tesla have sought to mitigate this
risk by vertically integrating their supply chains and developing
proprietary technology.
Buyers
The bargaining power of buyers is relatively low, as there are still
relatively few electric vehicle models available in the market, and
switching costs can be high due to the need for charging infrastructure
and range anxiety. However, as the market grows and more models
become available, buyers may gain more bargaining power.
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Strategy
What is Tesla’s Strategy?
Elon Musk Presentation, ‘Tesla Unveils Model S’ watch from 3:15
Click Here
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Strategy
4.2 Competitive Advantage
1 Brand: Tesla has built a strong brand that is associated with innovation,
technology, and sustainability. The company has a reputation for producing
high-quality, high-performance electric vehicles that are environmentally friendly
and provide a premium driving experience.
2 Technology: Tesla has invested heavily in developing its own proprietary
technology for electric vehicle components, such as batteries, motors, and power
electronics. This has enabled the company to achieve better performance, longer
range, and faster charging times than many of its competitors.
3 Production efficiency: Tesla has a highly automated production system that allows
it to manufacture vehicles at a lower cost and higher speed than many of its
competitors. The company’s Gigafactories produce large volumes of batteries,
which also gives it an advantage in terms of economies of scale.
4 Vertical integration: Tesla is vertically integrated, meaning that it controls the
entire supply chain, from the raw materials to the finished product. This allows the
company to have greater control over quality, costs, and production schedules.
5 Network effects: Tesla has a growing network of charging stations and service
centers that provide a convenient and reliable service for its customers. As more
people buy Tesla vehicles, the network becomes more valuable, which in turn
attracts more customers.
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Strategy
4.3 SWOT Analysis
Strengths Weeknesses
∗ Strong brand image and
reputation
∗ Innovative and
technologically advanced
electric vehicle technology
∗ Strong and growing global
demand for electric vehicles
∗ Large and loyal customer
base
Strong financial performance
with consistent revenue
growth
∗ ∗ High production costs and
low profitability
∗ Limited product line
∗ Reliance on a single supplier
for key components
∗ Limited distribution and
service network compared to
traditional automakers
∗ Vulnerability to economic
and political factors that
impact the automobile
industry
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Strategy
4.3 SWOT Analysis
Opportunities Threats
∗ Growing demand for renewable
energy and clean transportation
∗ Expansion into new markets such
as China, Europe, and emerging
economies
∗ Development of new products
such as energy storage solutions
and autonomous driving technology
∗ Opportunities for vertical
integration by producing key
components in-house
∗ Intense competition from traditional
automakers and new entrants in the electric
vehicle market
∗ Fluctuations in commodity prices,
particularly those related to battery
technology
∗ Potential for negative public perception
and backlash related to safety concerns,
labor practices, or environmental impact
∗ Economic downturns and global
instability impacting consumer demand and
investment in electric vehicles.
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Strategy
4.4 Profit Margin and Growth
2018 2019 2020 2021 2022
Profit Margin -4.55% -3.51% 2.19% 10.26% 15.45%
Gross Margin 18.83% 16.56% 21.02% 25.28% 25.60%
Sales Growth 82.51% 14.52% 28.31% 70.67% 51.35%
Profit Margin =
Net Incomet
Salest
Gross Margin =
Gross Incomet
Salest
Sales Growth =
Salest − Salest−1
Salest−1
Data sourced from FactSet Standardised Income Statements
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Strategy
4.5 Improving Competitive Advantage
Increase Production Capacity: Tesla can improve its competitive advantage by
increasing its production capacity, which will allow them to meet demand and
increase revenue
Expand Product Line: Tesla can also improve its competitive advantage by
expanding its product line beyond electric cars. For example, they can expand into
solar power, energy storage, and autonomous driving technology.
Improve Battery Technology: Tesla’s battery technology is one of its biggest
competitive advantages. By continuing to improve the efficiency and performance
of their batteries, Tesla can maintain its leadership in the electric vehicle market.
Lower Costs: Tesla can improve its competitive advantage by lowering costs, which
will enable them to offer more affordable electric cars. This can be achieved by
optimizing production processes, reducing materials costs, and increasing
economies of scale.
Develop Stronger Partnerships: Tesla can improve its competitive advantage by
developing stronger partnerships with other companies. For example, they can
partner with energy companies to promote the use of renewable energy or with
other technology companies to develop new products and services.
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Accounting Analysis
WEEK 5:
ACCOUNTING ANALYSIS
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Accounting Analysis
5.1 Key Accounting Policies
From Critical Audit Matters (p. 47, 2022 10-K).
Automotive Warranty Reserve
Notes to the Accounts:
Pricing adjustments on sales return reserve
Digital assets (p. 63, 68)
Research and Development (p. 40, 58, 82)
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Accounting Analysis
5.2 Flexibility in the Accounting
From 2022 10-K
(i.) Management’s estimate of the automotive warranty reserve for certain Tesla
vehicle models, including controls over managements significant assumptions
related to the nature, frequency and costs of future claims as well as the
completeness and accuracy of actual claims incurred to date. (p. 47)
(ii.) The estimates used for, but not limited to, determining significant economic
incentive for resale value guarantee arrangements, sales return reserves, the
collectability of accounts and finance receivables, inventory valuation, warranties,
fair value of long-lived assets, goodwill, fair value of financial instruments, fair
value and residual value of operating lease vehicles and solar energy systems
subject to leases could be impacted (p. 53)
(iii.) Pricing adjustments on our vehicle offerings can impact the estimate of likelihood
that customers would exercise their resale value guarantees, resulting in an
adjustment of our sales return reserve on vehicles sold with resale value
guarantees (p. 54)
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Accounting Analysis
5.3 Financial Statements Reflect Strategy?
Tesla’s strategy is reflected in its accounting in several ways. Here are a few examples:
1 Emphasis on growth: Tesla’s accounting reflects the company’s emphasis on growth. For
example, the company has invested heavily in research and development, and this is
reflected in its income statement as a significant expense. Additionally, Tesla’s balance
sheet shows significant investments in property, plant, and equipment, which indicates the
company’s commitment to expanding its manufacturing capacity.
2 Focus on sustainability: Tesla’s accounting also reflects the company’s focus on
sustainability. For example, the company’s financial statements highlight its efforts to
reduce its carbon footprint and promote the adoption of electric vehicles. Tesla’s
sustainability initiatives are reflected in its income statement and balance sheet through
investments in research and development, as well as in capital expenditures related to the
development of renewable energy technologies.
3 Innovation and technological advancement: Tesla’s accounting reflects the company’s
focus on innovation and technological advancement. The company’s financial statements
highlight its investments in research and development, which have enabled it to develop
cutting-edge electric vehicle technology. Additionally, Tesla’s financial statements indicate
significant investments in intellectual property and patents, which reflect the company’s
commitment to protecting its innovations.
Overall, Tesla’s accounting reflects the company’s focus on growth, sustainability, and
innovation. By investing heavily in these areas, Tesla has positioned itself as a leader in the
electric vehicle market and has attracted significant investor interest.
Source: ChatGPT
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Accounting Analysis
5.4 Incentives to Manipulate
2022 Proxy Statement
2018 CEO Performance Award based on adjusted EBITDA (p. 51)
Value realized on exercise or vesting of awards of CEO over $23.4
billion (p. 53)
Elon Musk never accepted a based salary (p. 48)
No cash-based bonus awards (p. 49)
“Equity award program is the primary vehicle for offering long-term
incentives to our named executive officers” (p. 49)
Elon Musk Technoking of Tesla, and Zachary Kirkhorn Master of Coin (p. 55).
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Accounting Analysis
5.4 Incentives to Manipulate
Financial Covenants
“The terms of certain of our debt facilities contain, and any of our other future
debt agreements may contain, covenant restrictions that may limit our ability to
operate our business, including restrictions on our and/or our subsidiaries ability
to, among other things, incur additional debt or create liens. In addition, under
certain circumstances we are required to comply with a fixed charge coverage
ratio. As a result of these covenants, our ability to respond to changes in business
and economic conditions and engage in beneficial transactions, including to obtain
additional financing as needed, may be restricted. Furthermore, our failure to
comply with our debt covenants could result in a default under our debt
agreements, which could permit the holders to accelerate our obligation to repay
the debt. If any of our debt is accelerated, we may not have sufficient funds
available to repay it.” (2022 10-K, p. 23)
“As of December 31, 2022, we were in material compliance with all financial debt
covenants.” (2022 10-K, p. 72)
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Accounting Analysis
5.5 Red Flags?
Nothing of note has been identified.
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Financial Analysis
WEEK 6:
FINANCIAL ANALYSIS
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Financial Analysis
Data Source
All data has been sourced from the FactSet Standardised Financial
Statements
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Financial Analysis
6.1 Asset Management Ratios
Operating Working Capital / Revenue =
Operating Working Capital
Sales
Trade Receivables Turnover =
Sales
Average accounts receivable
Days’ Receivable (DR) =
Average Accounts Receivable
Sales/365
Inventory Turnover =
COGS
Average Inventory
Days’ Inventory (DI) =
Average Inventory
COGS/365
Days’ Payable (DP) =
Average Accounts Payables
COGS/365
Cash conversion cycle (in days) = DR + DI − DP
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Financial Analysis
6.1 Asset Management Ratios
2020 2021 2022
Operating Working Capital/Revenue -8.19 -8.04 -10.87
Trade Receivables Turnover 19.65 28.34 33.49
Days’ Receivable 18.58 12.88 10.90
Inventory Turnover 6.51 8.16 6.52
Days’ Inventory 56.08 44.73 55.99
Days’ Payable 71.97 72.95 76.12
Cash Conversion Cycle 2.68 -15.34 -9.23
Working Capital = (Current Assets - Cash and Marketable securities) - (Current
Liabilities - Short Term Debt and Current Portion of Long Term Debt)
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Financial Analysis
6.2 Liquidity Ratios
Current Ratio =
Current Assets
Current Liabilities
Quick Ratio =
Cash + Short Term Investments + AC Rec
Current Liabilities
Cash Ratio =
Cash + Marketable Securities
Current Liabilities
Op Cash Flow Ratio =
Cash Flow from Operations
Average Current Liabilities
Average values are used for all balance sheet accounts.
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Financial Analysis
6.2 Liquidity Ratios
2020 2021 2022
Current Ratio 1.56 1.59 1.47
Quick Ratio 1.18 1.22 0.98
Cash Ratio 1.05 1.11 0.87
Operating Cash Flow Ratio 0.48 0.68 0.63
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Financial Analysis
6.3 Debt and Coverage Ratios
Debt-to-equity =
Short-term Debt + Long-term Debt
Shareholders Equity
Debt-to-capital =
Short-term Debt + Long-term Debt
ST Debt + LT Debt + Shareholders Equity
Interest Coverage =
Net Income + Interest Expense + Tax Expense
Interest Expense
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Financial Analysis
6.3 Debt and Coverage Ratios
2019 2020 2021
Debt-to-Equity 0.88 0.40 0.19
Debt-to-Capital 0.47 0.29 0.16
Interest Coverage 2.31 17.77 72.81
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Financial Analysis
6.4 Sustainable Growth Rates
ROE =
Net Income
Average Shareholders Equity
Dividend Payout Ratio =
Cash Dividends Paid
Net Income
Sustainable Growth Rate = ROE ∗ (1− Dividend payout ratio)
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Financial Analysis
6.4 Sustainable Growth Rates
2020 2021 2022
ROE 4.34% 19.99% 32.48%
Dividend Payout Ratio 0.00% 0.00% 0.00%
Sustainable Growth Rate 4.34% 19.99% 32.48%
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Financial Analysis
6.5 DuPont Analysis
2020 2021 2022
Net Profit Margin 2.19% 10.26% 15.45%
∗
Asset Turnover 0.73 0.94 1.13
ROA 1.60% 9.67% 17.42%
∗
Leverage 2.72 2.07 1.86
ROE 4.34% 19.99% 32.48%
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Financial Analysis
6.5 DuPont Analysis
0
1
2
3
4
5
6
7
-90.00%
-70.00%
-50.00%
-30.00%
-10.00%
10.00%
30.00%
50.00%
2013 2014 2015 2016 2017 2018 2019 2020 20201 2022
T u
r n
o v
e r
a
n d
L e
v e
r a
g e
P r
o f
i t a
b i
l i t
y
Leverage
Net Profit Margin
ROA
ROE
Asset Turnover
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Forecasting
WEEK 7:
FORECASTING
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Forecasting
Disclaimer
These are the forecasts made by Associate Professor Andrew Jackson.
They are not intended to be precise forecasts, and they are not based on
any superior knowledge. The key drivers have been forecasted to promote
in-class discussion. As discussed in class, individual responses will vary
legitimately based on the assumptions of the key drivers. DO NOT USE
THESE FORECASTS FOR ANY INVESTMENT PURPOSES.
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Forecasting
7.1 Growth Forecasts
GDP and Industry
US GDP Growth Forecasts
2023 2024 2025 2026 2027
The Conference Board 0.7% 0.9%
Trading Economics 2.7%
OECD 0.5% 1.0%
Statista 4.6% 3.3% 3.7% 4.0% 3.8%
Industry Growth
Global Electronic Vehicles industry revenue expected compound annual
growth rate (CAGR) 17.02% compound annual growth rate (Statistica)
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Forecasting
7.1 Growth Forecasts
Sales
Separate sales into segments and geographic region and make forecasts
separately to obtain an implicit sales growth forecast.
Automotive: New Tesla Model Y expected to be released in 2024.
United States: Following patterns from prior releases, sales growth
increases in the year of and year after release. As customers are not
expected to upgrade models with each release, sales growth is not
expected as high as prior years.. Long-term growth rate at 4.0%
China: Competition higher with BYD and NIO. Customer
dissatisfaction with navigational issues in China. Long term growth
rate at 7.6%
Other: Similar patterns as the US, but with greater competition in
the market from European manufacturers. Taking Worldwide as a
prediction of long-term growth, 4.3%.
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Forecasting
7.1 Growth Forecasts
Sales
Energy Generation & Storage: New factory in California
contributed to 2022 Q4 sales, but the ramp started in the middle of
the quarter, which means that the impact will be felt more in 2023.
Growth expected to continue into 2024, but then grow at a
decreasing rate.
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Forecasting
7.1 Growth Forecasts
Implied Sales Growth
2023 2024 2025 2026 2027
Revenue ($billion)
Automotive 85.396 101.468 123.543 133.105 139.403
Energy Generation & Storage 5.864 9.675 12.577 15.093 16.602
Total 91.260 111.143 136.120 148.198 156.005
Revenue Growth (%)
Automotive∗ 10.1% 18.8% 21.8% 7.7% 4.7%
Energy Generation & Storage 50.0% 65.0% 30.0% 20.0% 10.0%
Implied Revenue Growth 12.0% 21.8% 22.5% 8.9% 5.3%
A.B. Jackson (ACCT5910) TESLA T1, 2023 51 / 72
Forecasting
7.1 Growth Forecasts
Automotive Segment
2024 2025 2026 2027 2028
Revenue ($billion)
United States 44.608 55.314 71.909 77.661 80.744
China 19.597 21.948 24.143 24.074 28.067
Other 25.496 29.320 33.718 36.078 37.619
Total 89.701 106.583 129.770 139.814 146.430
Revenue Growth (%)
United States 10.0% 24.0% 30.0% 8.0% 4.0%
China 8.0% 12.0% 10.0% 8.0% 7.6%
Other 12.0% 15.0% 15.0% 7.0% 4.3%
Implied Revenue Growth 10.1% 18.8% 21.8% 7.7% 4.7%
Notes: There are no breakdown of automotive segment by region. I am assuming
growth rates within regions on total revenue to determine an implied revenue growth to
apply to the automotive sales growth.
A.B. Jackson (ACCT5910) TESLA T1, 2023 52 / 72
Forecasting
7.2 Forecasts
Drivers of Profitability
NOPAT margin: Tesla has been improving its profit margins.
However, I expect NOPAT margin to decline in the next five years due
to increased competition in the electric vehicle industry.
Opening Operating Working Capital to Sales: Operating working
capital expected to remain negative, but become less negative as
Tesla starts to move towards the mature stage of its lifecycle.
Opening LT Assets to Sales: Operating asset turnover has
improved to reflect strategy of higher volume of lower cost cars. This
pattern is expected to continue with further improvements.
After tax cost of debt: No expectation of any significant change,
predicting a gradual increase in the ratio up to 3%.
Opening Debt to Captial: No expectation of any significant capital
raising, either debt or equity. Debt to capital ratio is predicted to
remain stable.
A.B. Jackson (ACCT5910) TESLA T1, 2023 53 / 72
Forecasting
7.3 Forecasts
Forecasting Assumptions
2023 2024 2025 2026 2027
Sales Growth 12.0% 21.8% 22.5% 8.9% 5.3%
NOPAT Margin 14.0% 14.0% 12.0% 10.0% 8.0%
Opening Operating WC/Sales -6.9% -5.0% -4.0% -4.0% -3.0%
Opening LT Assets/Sales 38.8% 35.0% 35.0% 30.0% 30.0%
After tax cost of debt 1.5% 1.8% 2.0% 2.5% 3.0%
Opening Debt to Capital -57.4% -55.0% -52.0% -50.0% -45.0%
A.B. Jackson (ACCT5910) TESLA T1, 2023 54 / 72
Forecasting
7.3 Forecasts
2023-2027 Condensed Financial Statements ($billion)
Opening Balance Sheet
2023 2024 2025 2026 2027
Operating Working Capital -6.284 -5.557 -5.445 -5.928 -4.681
Long Term Operating Assets 35.451 38.900 47.642 44.459 46.808
Net Operating Assets 29.167 33.343 42.197 38.531 42.127
Net Debt -16.731 -18.339 -21.943 -19.266 -18.957
Shareholders Equity 45.898 51.681 64.140 57.797 61.085
Net Capital 29.167 33.343 42.197 38.531 42.127
Income Statement
2023 2024 2025 2026 2027
Sales 91.260 111.143 136.120 148.198 156.028
NOPAT 12.776 15.560 16.334 14.820 12.482
Interest expense after tax -0.251 -0.330 -0.439 -0.482 -0.569
Net Income 13.027 15.890 16.773 15.301 13.051
A.B. Jackson (ACCT5910) TESLA T1, 2023 55 / 72
Forecasting
7.3 Forecasts
Free Cash Flows ($billion)
2023 2024 2025 2026 2027
Net Income 13.027 15.890 16.773 15.301 13.051
less change in working capital 0.727 0.112 -0.483 1.247 -0.234
less change in long term assets 3.449 8.742 -3.183 2.349 2.340
plus change in debt -1.608 -3.604 2.677 0.308 -0.948
Free Cash Flow to Equity 7.244 3.432 23.116 12.014 9.997
2023 2024 2025 2026 2027
NOPAT 12.776 15.560 16.334 14.820 12.482
less change in working capital 0.727 0.112 -0.483 1.247 -0.234
less change in long term assets 3.449 8.742 -3.183 2.349 2.340
Free Cash Flow to Capital 8.601 6.706 20.000 11.224 10.376
A.B. Jackson (ACCT5910) TESLA T1, 2023 56 / 72
Forecasting
7.3 Forecasting
Excel Template
See the spreadsheet on Moodle for full details of the above information.
By 2028, assuming we have reached a steady state with an implied growth
rate of 5.0%.
A.B. Jackson (ACCT5910) TESLA T1, 2023 57 / 72
Forecasting
7.4 EPS Forecasts
2023 2024 2025 2026 2027
Number of Shares (million) 3,164
EPS $4.12 $5.02 $5.30 $4.84 $4.12
RNOA 40.9% 41.2% 40.5% 36.7% 28.9%
ROE 26.7% 27.4% 27.5% 25.7% 20.8%
Assuming no issue of new shares.
EPS =
Net Income
Shares Outstanding
RNOA =
NOPAT
Average Net Operating Assets
ROE =
Net Income
Average Shareholders Equity
A.B. Jackson (ACCT5910) TESLA T1, 2023 58 / 72
Valuation
WEEK 9:
VALUATION
A.B. Jackson (ACCT5910) TESLA T1, 2023 59 / 72
Valuation
Disclaimer
These are the valuations made by Associate Professor Andrew Jackson.
They are not intended to be used for any investment purposes, and they
are not based on any superior knowledge. The valuations are based on
assumptions made for the purpose of discussion, and are based on
forecasts made earlier. DO NOT USE THESE VALUATIONS FOR
ANY INVESTMENT PURPOSES.
A.B. Jackson (ACCT5910) TESLA T1, 2023 60 / 72
Valuation
9.1 Cost of Equity
Market Risk Premium
E[rm] = 5.94% Courtesy of Aswath Damodaran
Assuming holding the expected return on the market constant, the cost of
equity will vary with estimates of rf and β.
US Treasury Yields used for rf : < Click Here >.
A.B. Jackson (ACCT5910) TESLA T1, 2023 61 / 72
Valuation
9.1 Cost of Equity
Types of Beta
Raw Beta: obtained from the linear regression to a stock’s historical
data. Also known as Historical Beta, is based on the observed
relationship between the stock’s return and the returns of an index.
Adjusted Beta: is an estimate of a stock’s future beta. It is initially
derived from historical data, but modified by the assumption that it
will move towards the market average of 1 over time:
0.67 ∗ RawBeta + (0.33) ∗ 1.
Unlevered Beta: after removing the effects of capital structure:
RawBeta/(1 + (1− tax) ∗ (Debt/Equity )).
A.B. Jackson (ACCT5910) TESLA T1, 2023 62 / 72
Valuation
9.1 Cost of Equity
Variables
20Y10Y7&5Y3Y2Y1Y6M3M
3.83%3.47%3.55%3.56%3.77%3.93%4.34%4.80%4.81%
6.59%6.71%6.68%6.68%6.61%6.56%6.44%6.29%6.29%1.31Adjusted 5YFactset
6.78%6.93%6.90%6.89%6.81%6.75%6.58%6.40%6.39%1.40Adjusted 3YFactset
6.89%7.05%7.02%7.01%6.92%6.85%6.66%6.45%6.45%1.45Unlevered 5YFactset
6.91%7.08%7.04%7.03%6.94%6.87%6.68%6.46%6.46%1.46Raw 5YFactset
6.97%7.15%7.11%7.11%7.00%6.93%6.72%6.50%6.49%1.49Adjusted 52WFactset
7.00%7.18%7.14%7.13%7.03%6.95%6.74%6.51%6.51%1.50Barron's
7.06%7.25%7.21%7.20%7.09%7.01%6.79%6.54%6.54%1.531Y LeveredInfront
7.16%7.37%7.33%7.32%7.20%7.11%6.87%6.60%6.60%1.581Y UnleveredInfront
7.18%7.40%7.35%7.34%7.22%7.13%6.88%6.61%6.61%1.59Unlevered 3YFactset
7.21%7.42%7.37%7.37%7.24%7.15%6.90%6.62%6.62%1.60Raw 3YFactset
7.29%7.52%7.47%7.46%7.33%7.23%6.96%6.67%6.66%1.642Y UnleveredInfront
7.46%7.72%7.66%7.65%7.50%7.39%7.09%6.76%6.75%1.72Unlevered 52WFactset
7.50%7.77%7.71%7.70%7.55%7.43%7.12%6.78%6.78%1.74Raw 52WFactset
7.63%7.92%7.85%7.84%7.68%7.55%7.22%6.85%6.84%1.80Adjusted 90DFactset
7.80%8.11%8.04%8.03%7.85%7.71%7.35%6.94%6.93%1.883Y LeveredInfront
7.90%8.24%8.16%8.15%7.96%7.81%7.43%7.00%6.99%1.933Y UnleveredInfront
8.13%8.51%8.43%8.42%8.20%8.04%7.60%7.13%7.12%2.04CNBC
8.18%8.56%8.47%8.46%8.24%8.08%7.64%7.15%7.14%2.06Zacks
8.20%8.58%8.50%8.49%8.26%8.10%7.65%7.16%7.15%2.075YYahoo
8.41%8.83%8.74%8.72%8.48%8.30%7.81%7.27%7.26%2.17Unlevered 90DFactset
8.45%8.88%8.78%8.77%8.52%8.34%7.84%7.30%7.28%2.19Raw 90DayFactset
9.48%10.09%9.96%9.94%9.59%9.33%8.63%7.86%7.84%2.68Gurufocus
A 0 < β < 1 implies the stock prices will move with the overall market. As market returns increase, Tesla returns are expected
to increase less than the market. However, if market returns decrease, the loss on holding Tesla stock will be expected to be
lower as well.
A.B. Jackson (ACCT5910) TESLA T1, 2023 63 / 72
Valuation
9.1 Cost of Equity
In selecting a cost of equity, the risk-free rates from 3 month Treasury
Yield Curve of 4.81% appears the closest estimate of US debt with lowest
risk of default.
I will also use the Zack’s beta estimate of 2.06. For a publicly traded
company, removing the effects of capital structure does not appear to be
appropriate, hence not considering the unlevered betas.
re = 4.81% + 2.06(5.94%− 4.81%) = 7.14%
A.B. Jackson (ACCT5910) TESLA T1, 2023 64 / 72
Valuation
9.1 Cost of Equity
Sensitivity Analysis
For sensitivity analysis in my valuations, I will consider alternate high and
low re estimates:
Low re : Will use a 3 month risk-free rate with the FactSet Raw 5year
beta of 1.46. This will result in an estimate of re of 6.46%.
High re : Will use the highest estimate of re based on the 10 year
risk-free rate, and Gurufocus beta. This will lead to an estimate of re
of 10.09%.
A.B. Jackson (ACCT5910) TESLA T1, 2023 65 / 72
Valuation
9.2 Cost of Debt
Tesla Bond coupon rate 5.3%.
Potential estimates from Tesla’s 2022 10-K:
Search “interest rate”: p. 72 ranges 0.36-5.81%; p. 79 risk-free
interest rate 3.11%
Searches for: “interest”, “rate”, “borrowing” and “cost of debt”
return no relevant results.
From our worksheet – Interest expense / average total debt: -1.47%
From our worksheet – Interest expense / average total liabilities:
0.57%.
A.B. Jackson (ACCT5910) TESLA T1, 2023 66 / 72
Valuation
9.3 Weighted Average Cost of Capital
WACC = ωd ∙ rd ∙ (1− T ) + (1− ωd) ∙ re
Debt 5,748
Equity 50,452
ωd 0.1139
Tax Rate 21%
rd 5.70%
re 7.14%
WACC 6.80%
Debt is not equivalent to total liabilities.
The Tax Rate is the statutory corporate tax rate of 21%.
2022 Effective Tax Rate 8.25%: Income Taxes/Profit before Income Taxes
A.B. Jackson (ACCT5910) TESLA T1, 2023 67 / 72
Valuation
9.4 Valuation
Inputs
Information is taken from my forecasts presented earlier. Residual Income
(RI) is the difference between New Incomes and the Capital Charge, where
the capital charge is opening equity multiplied by re .
2023 2024 2025 2026 2027
Net Income 13.027 15.890 16.773 15.301 13.051
Opening Equity 45,898 51,681 64,140 57,797 61,085
re 7.14%
Capital Charge 3,276 3,689 4,578 4,125 4,360
RI 9,751 12,201 12,195 11,176 8,691
FCF Equity 7.244 3.432 23.116 12.014 9.997
From the forecasts, the assumption is that Tesla will reach a steady state
in 2027, with a constant growth rate of 5.0%.
A.B. Jackson (ACCT5910) TESLA T1, 2023 68 / 72
Valuation
9.4 Valuation
Calculations
Discounted Free Cash Flow
V0 =
7.224
1.0714
+
3.432
1.07142
+
23.116
1.07143
+
12.014
1.07144
+
9.997
1.07144
0.0714− 0.050
Residual Income Model
V0 = 45, 898 +
9, 751
1.0714
+
12, 201
1.07142
+
12, 195
1.07143
11, 176
1.07144
+
8,691
1.07144
0.0714− 0.050
A.B. Jackson (ACCT5910) TESLA T1, 2023 69 / 72
Valuation
9.4 Valuation
Price Per Share
Number of shares: 3,164
re
Low High
7.14% 6.46% 10.09%
Discounted Free Cash Flow $124.08 $180.59 $53.29
Residual Income Model $124.08 $180.59 $53.29
Assumed no long-term growth (i.e., 0%)
Discounted Free Cash Flow $55.76 $61.83 $38.87
Residual Income Model $55.76 $61.83 $38.87
Note: When changing growth rate, also need to alter 2028 sales growth
assumption.
A.B. Jackson (ACCT5910) TESLA T1, 2023 70 / 72
Valuation
9.4 Valuation
Monte Carlo Simulation
Assumptions on distribution
Growth rf Beta
Mean 5.00% 4.81% 1.77
Standard Deviation 0.25% 0.10% 0.33
1,000 Simulations
Price re Growth
Mean $157.58 6.80% 5.00%
Standard Deviation $47.00 0.38% 0.25%
5th percentile $106.60 6.18% 4.61%
15th percentile $117.86 6.42% 4.71%
Median $147.15 6.79% 4.99%
85th percentile $196.32 7.19% 5.26%
95th percentile $238.87 7.44% 5.40%
A.B. Jackson (ACCT5910) TESLA T1, 2023 71 / 72
Valuation
9.5 Comparisons with Current Price
Tesla market price at 7:00am (AEST) 10 April 2023: $185.00 (weekly high
$207.46 March 31; weekly low $181.67 April 6 (EST))
Why does my valuation differ from current price?
My forecasts are $1.97 (33%) under current price, and $57.59 (32%)
under the weekly low.
Of my simulations, 150 are at least 5% above current market price,
757 at least 5% below, and 93 within ± 5% of current price.
Need to figure out where the right mix between potential ‘errors’ in
the forecasting and valuation, versus ‘errors’ in the market pricing.
Overall, recommendation is . . . ?
A.B. Jackson (ACCT5910) TESLA T1, 2023 72 / 72