Tesla Motors, Inc.
/ (TSLA-NASDAQ)/ Equity Research / TSLA | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 10/07/2014
Current Price (02/11/15) / $212.80
Target Price / $223.00
SUMMARY
Teslareported adjusted loss of $0.48 per share in the fourth quarter of 2014 due to delivery shortfall and manufacturing inefficiencies along with adverse impact of the strong dollar. The loss compared unfavorably with the Zacks Consensus Estimate of a profit of $0.15. Revenues jumped 43.9% to $1.1 billion, missing the Zacks Consensus Estimate of $1.3 billion. Tailwinds for Tesla include rapid international expansion, an improved production rate and continued investment in infrastructure & product development. The Gigafactory construction is also expected to be favorable in the long term. However, several headwinds remain, including continuous losses, high R&D and SG&A expenses, and production constraints such as the shortage of battery supply./ Equity Research / TSLA | Page 1
SUMMARY DATA
52-Week High / $286.0452-Week Low / $178.59
One-Year Return (%) / 8.95
Beta / 0.65
Average Daily Volume (sh) / 3,921,759
Shares Outstanding (mil) / 125
Market Capitalization ($mil) / $26,600
Short Interest Ratio (days) / 6.07
Institutional Ownership (%) / 55
Insider Ownership (%) / 28
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 129.4
Earnings Per Share (%) / N/A
Dividend (%) / N/A
P/E using TTM EPS / N/A
P/E using 2015 Estimate / N/A
P/E using 2016 Estimate / 64.1
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Growth
Industry / Auto -Domestic
Zacks Industry Rank * / 114 out of 267
RECENT NEWS
Tesla Misses Q4 Estimates on Delivery Shortfall– Feb 11, 2015
Tesla reported adjusted loss (excluding one-time items other than stock-based compensation expense) of $0.48 per share in the fourth quarter of 2014, deteriorating from adjusted profit of $0.13 in the year-ago quarter. The loss compared unfavorably with the Zacks Consensus Estimate of a profit of $0.15. The loss was due to delivery shortfall andmanufacturing inefficiencies due to the launch of P85D and Autopilot functionality, along with adverse impact of the strong dollar.
The company’s fourth-quarter 2014 adjusted results excluded the impact of non-cash interest expenses related to convertible notes of $0.17 per share and deferred gross profit of $0.21 for Tesla’s Model S cars due to lease accounting. On the other hand, fourth-quarter 2013 adjusted results had excluded the impact of non-cash interest expenses related to convertible notes of $0.03 per share and deferred gross profit of $0.22 for its Model S cars due to lease accounting. Including these items, the company reported net loss of $0.86 per share, compared with net loss of $0.12 per share in the fourth quarter of 2013.
Excluding the impact of the deferment of Model S revenues due to lease accounting, top line jumped 43.9% to $1.1 billion in the reported quarter from $761.3 million a year ago. However, revenues missed the Zacks Consensus Estimate of $1.3 billion.
Tesla delivered 9,834 cars in the fourth quarter of 2014. It produced 11,627 vehicles in the quarter, thus achieving the production target of 35,000 Model S vehicles in 2014. Tesla delayed the launch of the Performance All-Wheel Drive Dual Motor car (P85D) in order to ensure the best quality for customers. This has resulted in shortfall in delivery in the fourth quarter.
Revenues (on a reported basis) from Automotive sales jumped to $956.7 million in the quarter from $610.9 million a year ago. Apart from higher vehicle deliveries, Automotive sales also benefited from $42 million of powertrain sales to Daimler AG (DDAIF) and $86 million of regulatory credits, including Zero Emission Vehicle (“ZEV”) credits.
Tesla did not generate any revenues from Development services (producing electric vehicle powertrain components and systems for other automobile manufacturers) during the quarter. In the fourth quarter of 2013, reported revenues from this business were $4.4 million.
Tesla’s fourth-quarter adjusted gross margin was 26.7%. Fourth-quarter automotive gross margin (excluding ZEV credits) was 22.0%. Quarterly gross margin was under pressure due to lower-than-expected average selling price.
2014 Results
Tesla recorded adjusted loss of $0.96 per share in 2014, wider than the Zacks Consensus Estimate of a loss of $0.34. In comparison, the company had generated profit of $0.15 per share in 2013. Net loss (on a reported basis) increased to $2.07 per share from $0.55 per share in 2013.
Revenues, excluding the impact of Model S revenues deferred due to lease accounting, surged 45.2% to $3.6 billion from $2.5 billion in 2013, but missed the Zacks Consensus Estimate of $3.8 billion.
Financial Position
Tesla had cash and cash equivalents of $1.9 billion as of Dec 31, 2014, compared with $845.9 million as of Dec 31, 2013. Long-term debt was $2.4 billion as of Dec 31, 2014, versus $586.3 million as of Dec 31, 2013.
Cash outflow from operating activities amounted to $57.3 million in 2014, compared with $264.8 million in the year-ago period. Capital expenditures increased to $969.9 million from $264.2 million in 2013.
Gigafactory Update
Tesla is constructing the Gigafactory as per plan near Reno, Nevada. The company started the steel fabrication of the structure nearly two months ago. Tesla plans to install equipment in the plant later this year. The automaker, together with Panasonic Corporation (PCRFY), will start the production of battery packs in the Gigafactory in 2016.
Model X Update
Tesla will start shipping the Model X in the third quarter of 2015. The automaker started the year with more than 10,000 orders for the Model S and almost 20,000 reservations for the Model X.
Outlook
Tesla expects to achieve a significant level of profitability in 2015 compared with the prior year. Production volume for the first quarter of 2015 is expected to be around 10,000 vehicles, compared with 11,627 vehicles produced in fourth quarter of 2014. Investments in manufacturing facilities will help the automaker to increase vehicle production to 2,000 units per week by 2015-end.
The automaker expects to deliver about 55,000 Model S and X vehicles globally in 2015, up 70% over 2014. The company expects 40% of these deliveries in the first half of 2015. Tesla plans to deliver 9,500 vehicles in the first quarter of 2015, up 47% over the first quarter of 2014.
Adjusted automotive gross margin is expected to be about 26% by the end of first-quarter 2015. The company believes that gross margin will benefit from its efforts to increase manufacturing efficiency and deliver a richer mix of products. The automaker plans to enhance profitability from the Model S and expects to achieve 30% gross margin on the car, fourth-quarter 2015 onward.
In 2015, operating expense are expected to increase 45%–50% compared with 2014. Selling, general and administrative expenses will be modest as the automaker will be focusing on enhancing operational efficiency. 2015 capital expenses are expected to be around $1.5 billion as Tesla is investing heavily in increasing production capacity, the development of the Model X, the Gigafactory construction and expansion of stores and services centers. Tesla also plans to expand its supercharger network by over 50% this year. The automaker will also focus on the development of other products like Model 3.
VALUATION
With respect to the P/B metric for the last quarter, Tesla Motors is trading at 26.5x, which is at a significant premium to the peer group and the S&P 500. The stock’s forward earnings estimates are also trading at a significant premium. Our long-term Neutral recommendation on the stock indicates that it should perform in line with the overall market. Our target price of $223.00 is based on a P/B multiple of 27.8.
Key Indicators
Earnings Surprise and Estimate Revision History
NOTE – THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.
OVERVIEW
Palo Alto, CA-based Tesla Motors Inc. (TSLA) was incorporated in Delaware in Jul 2003. The company designs, produces and sells electric cars and powertrain components. In Apr 2014, the automaker also started a subsidiary, Tesla Finance, to provide lease financing to business owners.
Tesla was established with the aim of facilitating the transition of the automobile market to environment-friendly electric vehicles. While the company currently produces sports cars and sedans for the high-end market, its ultimate goal is to produce an affordable electric car for the mass market.
In 2008, Tesla's first car, the Roadster, hit the market. The second car, the Model S sedan, entered the market in 2012. In 2013, the company unveiled its third car, Model X, which will be available from the third quarter of 2015.
Tesla currently operates over 125 stores and service locations across the globe. The company undertakes marketing and servicing of vehicles through wholly owned subsidiaries in North America, Europe and Asia.
To enable free and fast charging of vehicles, Tesla is developing a network of Superchargers in North America, Europe and Asia. These superchargers are industrial grade, high-speed chargers that can revive 50% of the battery of a Model S in 20 minutes and provide full charge in 75 minutes.
Tesla was listed on Nasdaq following its initial public offering in Jun 2010. The company made another public offering in Oct 2012, raising $222.1 million. In May 2013, the company announced a public offering that raised $355.5 million, while a private placement to the Chief Executive Officer (CEO) raised another $55 million.
Tesla settled in advance the outstanding balance from a $465 million loan from the U.S. Department of Energy (DOE) with the proceeds from its public offering and private placement in May 2013 as well as from a convertible senior note offering. The DOE had lent more than $8.5 billion to a few automakers under the Advanced Technology Vehicles Manufacturing (ATVM) Incentive Program in order to reduce dependence on oil, curb greenhouse gas emissions and to create new jobs. Through the pre-payment, Tesla became the first automaker to repay the entire amount.
REASONS TO BUY
Although electric cars occupy a small portion of the global automobile market, Tesla has acquired substantial market share within this niche segment. The company is witnessing growing sales due to the strong performance and impressive design of its products. Tesla delivered 7,785 cars in the third quarter, missing the guidance of 9,000 deliveries but improving 2.7% over the second quarter of 2014. In the second quarter, Tesla had delivered 7,579 cars, surpassing the guidance of 7,500 deliveries and improving more than 17% over the first quarter of 2014. Even in the first quarter of 2014, the company had surpassed its projection of 6,400 units. During 2013, Tesla delivered 22,477 Model S cars, making it the highest-selling vehicle in its price range in North America. The automaker expects to deliver about 33,000 vehicles globally in 2014, up 50% over 2013, but lower than the previous forecast of 35,000 vehicles due to production loss in the third quarter, resulting from plant retooling. Moreover, the company has large automakers like Daimler as clients for its electric powertrain components.
Tesla is now actively undertaking international expansion. The company started the delivery of Model S in Europe in Aug 2013 and in China in Apr 2014. Tesla also launched the right hand drive (“RHD”) Model S in the U.K. in June and in Hong Kong in July and plans to start its delivery in Japan later this year. Further, media reports stated that it started delivering vehicles in Australia and opened its first retail store and service centre in the continent earlier this month. The company plans to connect Sydney with Canberra and Melbourne via Superchargers in 2015. In 2016, it expects to connect the key cities on Australia’s eastern coast with Superchargers. Further, Tesla will open a store in Melbourne in 2015. The electric carmaker also plans to have 10 to 12 stores in China by the end of 2014, along with service centers and a Supercharger network. Tesla expects China to account for 30–35% of its global sales growth in 2014. Moreover, the waiver of a 10% purchase tax on domestic and imported electric, plug-in hybrid and fuel-cell vehicles on China from Sep 2014 through Dec 2017 should boost the electric carmaker’s sales in the nation. Additionally, Tesla plans to start manufacturing cars in China by 2017–2018. This will help it to avoid the 25% import tariff imposed by China, thus reducing car prices in the nation. This will likely boost sales. Tesla launched a new assembly and distribution center in the Netherlands in Aug 2013 that will allow the automaker to supply car parts anywhere in Europe within 12 hours. Tesla's operations in Europe will expand further with the opening of new stores and service centers, and the expansion of the Supercharger network. The electric carmaker also started taking orders for Model S and Model X in Japan in Nov 2013. Tesla expects sales in Europe and Asia to be double the sales in North America by the end of 2014.
Increased factory capacity and lower supplier bottlenecks are helping Tesla in increasing production to meet the rising demand for Model S. The company’s Fremont, CA plant underwent assembly line upgrading, body shop capacity expansion, powertrain assembly improvement and betterment of facilities for the staff in the third quarter of 2014. Consequently, the production process has become more automatic and the plant can produce cars faster. Further, the work environment has improved. The retooling will result in 50% higher production in 2015, compared to the expected production of 35,000 units in 2014. Currently, the assembly line produces nearly 1,000 cars per week, while Tesla is targeting 2,000 units per week by the end of 2015. The increase in production will lead to higher revenues as currently the demand for Tesla’s cars exceeds supply.
In order to deal with the shortage of lithium-ion batteries, Tesla is building a Gigafactory in Nevada to produce the batteries in collaboration with various partners, including Panasonic. The automaker will receive tax incentives of $1.3 billion spread over 20 years from the Nevada government for the construction of the Gigafactory. Tesla expects to finish the factory by 2017.By 2020, the automaker expects the annual lithium-ion battery production of the Gigafactory to exceed the global production of 2013. The factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars by 2020. It will also reduce the ‘per kWh’ cost of production of battery packs by over 30%.The automaker expects the factory to provide economies of scale and reduce production costs based on innovative manufacturing techniques, reduced logistic wastes, optimization of co-located processes and lower overhead costs.
Tesla has started a subsidiary, Tesla Finance, in order to provide lease financing to business owners for buying Model S. The company has tried to make the process of obtaining the lease as simple as possible. This is likely to make it a popular option among business owners as they can deduct the lease payment from their business taxes as well. The automaker leased 347 vehicles in the U.S. in the third quarter. Tesla expects to lease about 3,000–3,500 vehicles in North America in the fourth quarter. Apart from the leasing option, Tesla has banking partners who offer car loans to consumers. These financing options will likely help attract new consumers.
Tesla gains a competitive edge over its peers through its stylish and high-performing products. The automaker managed to gain consumers’ attention through Roadster and Model S, both of which offer impressive range and speed. Moreover, Model S has the lowest possibility of injury to passengers among all major cars in the U.S. The car won a five-star vehicle safety rating from the National Highway Traffic Safety Administration (NHTSA) in Aug 2013 that was reiterated in Dec 2013. The five-star rating is awarded to only 1% of the cars tested. Moreover, Tesla’s Vehicle Safety Score of 5.4 exceeded the score of most sports utility vehicles and minivans. The automaker further enhanced the safety features of the car in Mar 2014 by adding three layers of protection under the battery pack, which, according to Tesla, will reduce the safety risk due to any underbody impact to almost zero. In May 2014, Model S was ranked as the fastest green car by the Automobile Association of America's Green Car Guide, along with Toyota’s RAV4 EV. In Dec 2014, the car obtained the first spot in the Consumer Reports buyer survey for the second consecutive year. The vehicle received 98% satisfaction in the survey this year, while it earned an astounding 99% last year.
Tesla is rapidly developing a network of Superchargers which will not only provide free charging to Model S owners, but also charge the battery packs faster than normal electric charging stations. They can restore half the battery charge in just 20 minutes and full charge in 75 minutes, while normal charging stations take as much as 9 hours for a full charge. Tesla currently has about 140 Superchargers in North America, 112 in Europe and 42 in Asia-Pacific. In Aug 2014, the company announced a deal with China’s second largest mobile carrier, China Unicom, to develop a network of 400 charging stations at China Unicom stores in 120 Chinese cities. Additionally, they will build Supercharging stations in 20 Chinese cities. The automaker also signed deals with Chinese real estate developers to jointly construct Superchargers in the nation. Moreover, there have been reports that Tesla is in talks with BMW and Nissan to jointly develop charging networks.
Tesla is also aggressively working toward expanding its product portfolio to boost sales. The company launched the world’s first dual electric motor production car as well as an all-wheel drive version of Model S. Tesla also introduced an autopilot system that features traffic aware cruise control and stops the car from inadvertently changing lanes. It allows automatic lane changing by a single turn signal and lets the car read road signs and automatically adjust speed. These features will be integrated in all new Model S vehicles, going forward. The company’s Model X car will hit the market in the third quarter next year. The company also launched a right-hand version of Model S in Britain in Jun 2014. Moreover, Tesla’s third-generation electric car, Model 3, which is expected to cost half as much as Model S, is expected to be unveiled in 2015 and launched in 2017. The company’s ultimate aim is to produce an affordable family car that will make electric cars accessible to the masses. Moreover, in Nov 2013, Tesla announced that it is considering developing an electric pickup truck within five years. The truck will be modeled after Ford’s best-selling F-150 pickup. Tesla is also developing an autopilot system, which will allow its cars to be 90% self-driven. The company is aiming to launch the auto-pilot system in 2016, although the technology for a completely self-driven car will take around 5–6 years to develop.