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Tesla Motors (TSLA) Pitch

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  • Geoffrey Horton 4/30/2013

    TESLA MOTORS (TSLA)

    COMMON STOCK SHORT PITCH

    A brief note on why Elon Musk cant even make you drop your gas guzzler

  • TABLE OF CONTENTS

    Table of Contents

    Who are they? ___________________________________________________________________________________ 1

    Welcome to the Real-World, Mr. Musk_________________________________________________________ 2

    The Oil Boom That Wasnt Supposed to Happen _____________________________________________ 5

    A Government Love Affair ______________________________________________________________________ 6

    Whats the Trade? _______________________________________________________________________________ 7

    Bull Case _________________________________________________________________________________________________ 7

    Bear case ________________________________________________________________________________________________ 8

    Final Assesment ________________________________________________________________________________________ 9

    Your 1Q 2013 (and beyond) Cheat Sheet ____________________________________________________ 10

    Appreciation ____________________________________________________________________________________ 11

  • WHO ARE THEY?

    Page 1

    Who are they?

    Tesla Motors manufacture, sell and service fully electric vehicles (EV), as well as produce and sell

    powertrain systems. Founded in 2003 by Elon Musk, co-founder of PayPal and CEO of SpaceX, Tesla is a

    young, but growing leader in the EV space.

    Teslas first commercially produced vehicle, the Tesla Roadster, was the first federally-compliant EV in the

    nation. With the ability to go from zero to sixty in 3.9 seconds, while letting you keep your usual driving

    habits with a long-lasting battery, Tesla helped turn the idea of an EV into a budding industry. Finding a

    decent response to their first vehicle, Tesla began shipping an electric sedan (Model S) in June 2012 to

    appeal to a broader audience. Tesla has also announced the upcoming release (late 2014) of the Model X

    crossover, which will be able to fit seven adults. Furthermore, there has been recent talk of a third

    generation vehicle in the works, though no detailed information has been released.

    Roadster Model S Model X

    Battery Options

    53kWh 60kWh, 85kWh, 85kWh (Performance Model)

    60kWh, 85kWh

    Est. Range 245mi 230mi, 300mi, 300mi 230mi, 300mi

    Base Price $109K $70K, $80K, $95K $70K, $80K

    Delivered as of 12/31/12

    2,450 2,650 N/A

    Figure 1: Tesla Motors current and future models12

    In addition to selling vehicles, Tesla designs, produces and sells electric powertrain systems to Daimler for

    their EV series, as well as Toyota for their RAV4 EV. Both companies have done business with Tesla since

    2010 and hold a combined 7.8mm shares in the company. Revenue from powertrain systems only

    accounted for 8.1% of total sales in 2012.

    Tesla Motors raised nearly $185mm, after fees, from their IPO in June 2010 when the company and insiders

    sold over 15mm shares. In 2011, Tesla received nearly $230mm from an additional stock offering nearing

    8mm shares. There was another follow-on offering in late 2012 when roughly 8mm shares were sold, raising

    over $220mm in cash. There are approximately 114.5mm shares outstanding and 72.9mm in public float.

    1 Teslamotors.com 2 Tesla Motors 2012 10-K estimates

  • WELCOME TO THE REAL-WORLD, MR. MUSK

    Page 2

    Welcome to the Real-World, Mr. Musk

    As with any startup in a new industry, cash and a competitive edge become the essential ingredients for

    survival. As a veteran of Silicon Valley, Mr. Musk knows this and has taken nearly every action to ensure

    Tesla stays afloat until it can reach profitably. He estimates Tesla will be in a much better fiscal position this

    year when production of the Model S ramps up, as can already be seen in Q4 2012 revenue results.

    Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

    millions $ 2011 2011 2011 2011 2012 2012 2012 2012

    Total Revenues 49.03 58.17 57.67 39.38 30.17 26.65 50.10 306.33

    Cost of Goods Sold 31.00 39.66 40.44 31.54 19.96 21.89 58.87 282.48

    Gross Profit 18.03 18.51 17.22 7.84 10.21 4.76 8.76 23.86

    Gross Margin % 36.8% 31.8% 29.9% 19.9% 33.8% 17.9% 17.5% 7.8%

    Total SG&A 65.37 77.25 81.70 88.76 98.97 110.94 99.70 114.74

    Operating Income (47.35) (58.74) (64.48) (80.93) (88.76) (106.18) (108.46) (90.88)

    Net Interest and Other 1.49 0.07 0.59 0.50 1.08 (0.69) 2.19 (0.75)

    Pre-Tax Profit (48.79) (58.76) (64.99) (81.38) (89.81) (105.49) (110.69) (90.08)

    Income Taxes 0.15 0.14 0.09 0.11 0.06 0.11 0.12 (0.15)

    EPS (0.51) (0.60) (0.63) (0.78) (0.86) (1.00) (1.05) (0.79)

    Fiscal Quarters

    Figure 2: Q1 2011 through Q4 2012 fiscal results3

    As previously mentioned, the rate at which a startup spends cash is an important factor to consider. Since

    the COGS and R&D budget cause Tesla to run under a negative operating income, raising cash has been the

    only option recently. The company has sold millions of shares in follow-on offerings, paired with key

    partners in exchange for stock, and even taken out a $465mm loan with the U.S. DOE (discussed later).

    Though the offerings have resulted in much need cash, the dilution has been detrimental for balance sheet

    statistics. Also, the partnership with Toyota has resulted in a deal where Tesla is expected to receive

    $100mm from Toyota between 2012 and 2014, but the company is limited in the fact that it cannot continue

    to attract business in this manner. Furthermore, while the DOE loan was useful, it has already been fully

    drawn on. Tesla is now on the hook to comply with strict and increasing regulatory demands.

    Another cash option that is available to Tesla comes from their unique way of holding customer reservation

    deposits. For a customer to get a spot in line to receive a Model S or X, they must pay a $5,000 refundable

    deposit. Tesla notes that they use these funds for working capital and other general corporate purposes.4

    3 Bloomberg 4 Tesla 2012 10-K

  • WELCOME TO THE REAL-WORLD, MR. MUSK

    Page 3

    As of December 31st, 2012, there were at least 15,000 customer reservations for the Model S. Using simple

    math and not subtracting how many of those customers may be from Washington where deposits are held in

    a segregated account, Tesla may have more than $75mm at their disposal simply from Model S reservations.

    The company started taking deposits for the Model X in February 2012, but there has been no indication of

    those reservation numbers. Tesla has noted, though, that they are holding $138.8mm in combined Model S

    and Model X reservation deposits.

    Looking at the actual sale of vehicles up until December 31st 2012, Tesla has delivered approximately 2,450

    Roadsters, produced 3,100 Model S vehicles and have delivered 2,650 of them. Tesla is currently targeting a

    production rate of 20k Model S vehicles in 2013 and 10-15k Model X vehicles when production begins in

    2014. Tesla has recently reached a steady state production rate of 400 vehicles a week, so these goals seem

    reasonable.

    Figure 3: Tesla revenue by region, 2010-20125

    Tesla plans to start their European deliveries for the Model S in summer 2013 and Asian deliveries in late

    2013. It is important to note the changing dynamic in sales by region, especially as transportation costs are a

    much larger issue in Europe. Ford recently announced that they expect to reach profitability again in Europe

    by 2015, giving similar companies international hope.

    Though the company has only had one quarter of positive operating income, Mr. Musk made a public

    announcement on April 1st about Tesla reaching full profitability for Q1 2013.6 He said that Tesla sold more

    than 4,750 model S sedans, easily beating analyst expectations. There was no indication on how Tesla was

    able to dramatically increase the rate of actual sales. It should be noted, though, that Tesla recently asked

    numerous customers on the reservation list to configure their cars for delivery or risk losing their product

    5 Tesla 2010 and 2012 10-K 6 http://www.latimes.com/business/la-fi-hy-autos-tesla-profit-20130402,0,1962678.story

    North America

    Europe

    Asia

    2010 REVENUE

    North America

    Europe

    Asia

    2012 REVENUE

  • WELCOME TO THE REAL-WORLD, MR. MUSK

    Page 4

    slot and/or their 2012 pricing7. This could become a future tactic to squeeze more cash from depositors,

    though it could lead to a short-term inflation of vehicle sales.

    Figure 4: Q1 2013 Analyst expectations8

    7 Tesla 2012 10-K 8 Bloomberg

  • THE OIL BOOM THAT WASNT SUPPOSED TO HAPPEN

    Page 5

    The Oil Boom That Wasnt Supposed to Happen

    I think the most important thing is electrification [on the future of automobiles], becausewe have a limited

    supply