TESLA, INC.

(NASDAQ: TSLA)
CONTENTS
Introduction.............................................................................................................................................................................. 4

Objective of the Project.................................................................................................................................................... 4

About the Company........................................................................................................................................................... 4

Governance and Communication Analysis.................................................................................................................... 5

CEO & Chairman................................................................................................................................................................. 5

Audit Committee................................................................................................................................................................. 5

Class of Shares..................................................................................................................................................................... 6

Institutional Ownership................................................................................................................................................... 6

Executive Compensation................................................................................................................................................. 7

Earnings Call......................................................................................................................................................................... 7

Strategy Analysis..................................................................................................................................................................... 9

Industry Analysis : Porter's Five Forces.................................................................................................................... 9

Company Strategy Analysis : Product Differentiation.......................................................................................12

Financial Analysis................................................................................................................................................................. 13

Re-Casted Income Statement...................................................................................................................................... 13

Re-Casted Balance Sheet............................................................................................................................................... 14

Common-size Income Statement............................................................................................................................... 15

DuPont Analysis............................................................................................................................................................... 16

Ratio Analysis.................................................................................................................................................................... 17
 Risk Analysis...................................................................................................................................................................... 21

Forecasting.............................................................................................................................................................................. 23

Sustainable Growth......................................................................................................................................................... 23

Weighted Average Cost of Capital.............................................................................................................................. 23

5-Year Income Statement Forecast........................................................................................................................... 25

References............................................................................................................................................................................... 27
INTRODUCTION

OBJECTIVE OF THE PROJECT

The purpose of this report is to analyze the performance of Tesla, Inc. The objective is not

constrained to reviewing the financial performance of the company, but also focuses and evaluates

the industry attractiveness, company's strategy and also critically evaluates the corporate

governance of the company. Within the financial analysis, the project covers the common size

analysis of income statement, profitability and activity ratios, DuPont analysis and also risk

management of the firm. In addition to financial analysis, it is necessary for any analyst or investor

to assess the industry attractiveness and industry sustainability.

ABOUT THE COMPANY

Tesla, Inc., earlier known as Tesla Motors is an American automakers as well as energy

company providing energy storage and solar panels ("About Tesla | Tesla"). The company deals in

Electric Vehicles, lithium-ion energy storage batteries and photovoltaic panels. The company's first

electric vehicle model- Model S was best-selling luxury car in America (Morris) with more than

150,00 global sales in 2016 and was regarded as the world’s best-selling plug-in passenger vehicle

for consecutive two years. (Cobb). Additionally, the company launched its Model X, a crossover SUV,

in September 2015 and Model 3 in July 2017.

The company was founded in 2003 by Martin Eberhard and Marc Tarpenning, and Elon

Musk and others as co-investors. And in June 2010, the company went public by an IPO and got

itself listed on Nasdaq with the script code "TSLA".

GOVERNANCE AND COMMUNICATION ANALYSIS

CEO & CHAIRMAN

Elon Musk, is the co-founder, CEO and also the Product Architect. He co-founded Tesla by

provide Series A funding and helping Mr. Eberhard and Mr. Tarpenning. And he assumed the

position of CEO in 2008 ("Elon Musk | Tesla"). In addition to being CEO, he also assumes the roles of

Chairman of the board since 2004. It is common to have same person as CEO heading the

management of the company and also heading the executive position of the company, for a firm in

its early growth phase and the founder wants to drive the growth.

Having same person for both the positions may actual be an corporate governance issue

because Chairman of the board represents the shareholders while the CEO has duty to manage the

business. This may result in conflict of interest and decisions may be taken which may not be

favored by or may not be in the interest of the shareholders. However in the case of Tesla, Mr. Musk

himself owns about 22.0% of Tesla’s outstanding common stock which he acquired from his direct

investments in the company. ("Tesla - Definitive Proxy Statement", pp.13). Being one of the majority

shareholders and the largest shareholder of the company ensures the alignment of interest with the

other stakeholders.

AUDIT COMMITTEE
Audit committee of the company is comprised of three members - Robyn M. Denholm;

Antonio J. Gracias and Stephen T. Jurvetson. Ms.Denholm serves as the chair of the committee and

also is regarded as “audit committee financial expert” as defined in the rules of the SEC. The scope

of Audit committee is to review the selection of independent auditors, approve the audit and non-

audit services to be performed independent auditors; monitor the integrity of financial statements,

review the compliance with legal and regulatory requirements; review the adequacy and
effectiveness of internal control policies and procedures; etc. Since Audit committee deals with

financial statements and accounting, it is necessary to some of the members of the committee to

have financial knowledge. Ms. Denholm has diversified experience in the field of finance as she has

served as CFO of Juniper Networks, Inc., and has worked on several finance assignments with

Toyota Motor Corporation Australia for seven years and Arthur Andersen & Company for five years.

She is also a Fellow of the Institute of Chartered Accountants of Australia. Mr. Gracias holds a joint

B.S. and M.S. degree in international finance and economics. Thus, in my opinion, the board

composition is appropriate with having to persons from finance. ("Tesla - Definitive Proxy

Statement", pp.10,24)

CLASS OF SHARES
The company has common stocks and also the convertible notes. The common stock entitles

one vote per each stock, while the convertible notes does not have voting rights. As of April 13,

2017, it had 164,193,935 common stock outstanding. ("Tesla - Definitive Proxy Statement", pp.2)

Mr. Musk owns 22.0% of the stock outstanding and has voting weight of 22%. However he

being the CEO, Chairman as well as founder of the company would not use the influencing voting

rights in a way harmful to either the company or the other shareholders.

INSTITUTIONAL OWNERSHIP
As of December 31, 2016, Mr. Musk owned approximately 22.0% of Tesla’s outstanding

common stock, followed by FMR LLC, a multinational financial services corporation, owning 13.6%.

Baillie Gifford & Co, investment management firm, owns 8.2% while T. Rowe Price Associates, Inc. ,

American publicly owned global asset management firm, has ownership of 7.4% of the Tesla's

common stock outstanding. Considering the large shareholders (share holding more than 5%),

about 29.2% is held by institutional investors while 20.0% if by individual. ("Tesla - Definitive

Proxy Statement", pp.49)

 Having large investment management firms as large shareholders brings some benefits to

the company like the institutional investors are learned investors and have analysts to study their

investment potential, their presence spreads the trust amongst the retail investors. However any

selling by them may result in negative sentiment among the other investors and given the high

volume of trade, creates the negative pressure on the price of the stock and in turn on the valuation

of the company. ("Institutional Investments - Benefits")

EXECUTIVE COMPENSATION
For the fiscal year 2016, Mr. Musk received the total compensation of just $45,936 which

includes only the basic salary component. The compensation is far too less in comparison with the

compensation of $7.927,583 paid to Jeffrey B. Straubel, Chief Technology Officer and compensation

of $6,464,510 to Jon McNeill, President, Global Sales and Service. The base salary paid to the CEO is

as per current minimum wage requirements under applicable California laws. However, he has

never accepted and currently does not accept his salary. There were no equity based incentives or

performance linked bonus for the year 2016. The last equity-based compensation was given to Mr.

Musk in the year 2012, which was linked to market capitalization targets and achievement of

operational milestones like completion of prototypes of various car models, vehicle production

targets etc. . ("Tesla - Definitive Proxy Statement", pp.38)

Mr. Musk has not received any stock through equity awards in form of compensation but has

acquired most of the owned stock through direct capital investments.

EARNINGS CALL
The analyst call for Q3 2017 was held on November 01, 2017. Mr. Musk gave significant

updates on the company's performance including more than 0.25 million cumulative deliveries of

Model S and Model X since the start of the company. For the Model 3, the progress is on track, but

with about 10,000 sub parts for making the product, may result in bottleneck, but the company is
making progress on it and the CEO expects to achieve a weekly production rate of 5,000 Model 3

vehicles by late Q1 2018. The CEO acknowledged that battery module assembly has been a

bottleneck as the system integrator sub-contractor left requiring the company to rewrite the

software and redo many of the mechanical and electrical elements. Besides giving the update on

manufacturing facilities, the CEO has assured that there are no layoffs and news about layoffs is

false. And then the call was open for Q&A. I had a question related to capital spending targets since

it required reworking on some tasks and delay in the production. Does this change the capital

spending target of the company. Also delay in the production of the Model 3, does it impact the

company's market position as keep us behind the competitor.

STRATEGY ANALYSIS

INDUSTRY ANALYSIS : PORTER'S FIVE FORCES

Limited Players
Intensity of Competition
Aggresive Players
Low Switching Cost

Limited Substitutes
Consumer Bargaining Power
Low volume of Purchase
Low Switching Cost

Low Volume of Purchases

Supplier Bargaining Power
Large number of suppliers
Limited Forward Integration

Moderate performance of Substitutes

Threat of Substitutes Low Switching Cost

Large Economies of Scale

Threat of New Entrant High Entry Cost

Tesla's operations can be regarded under the Motor Vehicles and Passenger Car Bodies (SIC:

3711), Auto & Truck Manufacturers Industry. In addition to automobiles, the company also sells

energy storage products and solar energy systems. The strategy of the firm is impacted by a lot of

external factors including the industry attractiveness, position of its customers and suppliers and

its competitive position. It needs to realign its tactics and long term strategy as per the industry

condition to ensure its long term sustainability.

Intensity of Competition (Strong)

The firm operates in a highly competitive market primarily because of aggressive

competition between the existing players driven by continuous investment in making their product
advanced, excessive marketing campaigning and aggressive selling to cover high manufacturing

cost. Low switching cost for the consumers further intensifies the competition. The consumer can

easily buy their second car from some other manufacturer. However, the number of players

operating in the industry are limited, partially moderating the competition. There are only a few

players manufacturing non-conventional cars. The players include General Motors, Nissan and

Mazda. In order to manage this force, Tesla needs to continue positioning itself as high quality

electric vehicle manufacturer and spend on R&D to manufacturer highly reliable products.

Threat of New Entrants (Weak)

This force relates to ease for new entrants to enter into the market and raise competition.

With regards to the niche segment of Tesla into hybrid vehicles, the threat of new entrant is weak

driven by high entry cost, high economies of scale and high branding cost. For a new player to enter

this space requires a lot of capital expenditure in form of research & design, equipments, branding,

marketing etc. The high cost of entry prohibits new players to easily enter the market. Also, the

industry requires high economies of scale i.e. to be profitable and competitive, it is necessary to

have large scale of operations. Thus, threat of new entrant is a weak force.

Threat of Substitutes (Low)

Substitute for this industry is any mode of transport which becomes a substitute for the

consumer. There are substitutes like public transport, conventional vehicles etc but the

performance of those would not match the performance of Tesla vehicles. Thus, limiting the threat

of substitutes. Also, the consumers of e-vehicle would not regard conventional vehicles as pure

substitutes. However, low switching cost for consumers to move away from one mode of transport

to another slightly raises the threat of substitute.

Bargaining Power of Buyers (Moderate)

Buyers are the revenue drivers for the company and its operations and financial

performance is directly linked to the buyers and potential buyers. In case of Automotive Industry,
the bargaining power of buyer i.e. the influence of buyer is moderate. One of the major factor

impacting the Buyer's bargaining power is switching cost i.e.. direct and indirect cost to change

from one product to another. In the case of automobile, the switching cost is very low i.e.. a buyer

can easily decide of buying a car of some other brand which may be different from the one it uses.

Low switching cost reduces the power of company and raises the bargaining power of the buyer.

However factors like low substitute availability and low volume of purchases weakens the

bargaining power of the consumer. There are very limited substitutes, if a buyer wants to buy a four

wheeler car, he has very limited substitutes in form of kind of fuel but the technology and the

product is almost limited. Limited substitutes reduces the bargaining power of the consumer. Also,

low volumes i.e. a consumer would buy one or maximum of two cars and does not have controlling

power in deciding the pricing terms. Any single consumer would not have any impact on the

operations of the company, thus does not reducing its bargaining power. Thus, the Buyer's

bargaining power for the automotive industry is moderate because of low switching cost, low

product volume and limited substitutes.

Bargaining Power of Suppliers (Moderate)

Suppliers are integral part of the industry as they have the influence over the availability of

raw materials and terms of supply. Tesla uses thousands of parts for manufacturing or assembling

its end product and these are sourced from hundreds of suppliers globally. (Tesla-Annual Report,

2016, pp. 9) Most of the suppliers are single source suppliers. (Tesla-Annual Report, 2016, pp.15).

This forces Tesla to be dependent on those suppliers for key equipments, giving suppliers a

bargaining power. However Tesla has been continuously trying to expand its supply chain and have

multiple source suppliers. Also, the suppliers are not forwardly integrated i.e. they manufacture just

one or two components and not the semi-assembled units. The volume of purchases from each

supplier is low as it requires multiple inputs sourced from multiple suppliers and the size of each

supplier is also low. Thus the bargaining power of the supplier is regarded as moderate because of
moderate size of supplier, low volume from each supplier and lack of forward integration at

supplier's end.

COMPANY STRATEGY ANALYSIS : PRODUCT DIFFERENTIATION

Tesla entered the market of electric cars by launching Roadster in 2008, which was a high

performance electric sport car targeted for high-end class. The product was designed to compete

with gasoline sports car like a Porsche or Ferrari and was differentiated in terms of efficiency. Given

that the company was dealing in a completely new technology which has huge initial cost, the

company targeted the high-end class who are willing to pay premium for a quality product (Musk,

Elon). However as per its CEO the long term plan of the company is to build wide range of cars

including the affordable family segment. The company is using the free cash flows generated from

the sales of Roadster in R&D for new products. This is like high-end customers buying the Roadster

are indirectly funding the affordable car segment. Currently, Tesla uses the differentiation strategy

targeting high end customers who are willing to pay premium. Once it is more established and is

cash rich, it targets to enter the more competitive lower priced market (Dutta, Arieez). Its latest

product, Model 3, is priced at $35,000 much cheaper than its expensive products Model S and X.

Also, one unique thing of Tesla, unlike other firms using differentiation strategy, it does spend much

on advertising or paid promotion. The firm believes in its quality and depends on word-of-mouth

and free media coverage. This further gives Tesla a cost and competitive edge over other technology

car manufacturers like Nissan. Nissan spent $4.3 million for promoting its electric car Nissan leaf,

General Motors spent $3.7 million to promote Chevrolet Bolt while Tesla claims it spent nothing.

Tesla began taking advance deposit towards pre-booking of its Model 3 in 2016 and as of August

2017, it had order book of 455,000. (Schultz, E.J.)

FINANCIAL ANALYSIS
This section focuses on the financial position of the company and analyses the company's

profitability and the factors driving the profitability. In order to provide key items of the financial

statement, we provide the abridged statements displaying the key numbers.

RE-CASTED INCOME STATEMENT

Since there were no extraordinary items, the re-casted income statement has no major

adjustments and represents the reported income statement of the company.

US$ mn Dec-14 Dec-15 Dec-16

Total Revenue $3,198.36 $4,046.03 $7,000.13
Cost of Revenue ($2,316.69) ($3,122.52 ($5,400.88)
)
Gross Profit $881.67 $923.50 $1,599.26
Operating Expenses
Research and Development ($464.70) ($717.90) ($834.41)
Sales, General and Admin. ($603.66) ($922.23) ($1,432.19)
Operating Income ($186.69) ($716.63) ($667.34)
Add'l income/expense items $2.94 ($40.14) $119.80
Earnings Before Interest and Tax ($183.75) ($756.77) ($547.54)
Interest Expense ($100.89) ($118.85) ($198.81)
Earnings Before Tax ($284.64) ($875.62) ($746.35)
Income Tax ($9.40) ($13.04) ($26.70)
Minority Interest $0.00 $0.00 $98.13
Net Income ($294.04) ($888.66) ($674.91)
Source: Tesla-Annual Report, 2016, pp. 56

The company has been posting losses for all the three years primarily because high research

and development cost and SG&A cost. In terms of revenues, the total revenue for 2016 increased by

73% driven by strong performance in all the segments of the company - Automotive (+62%);

Automotive Leasing (+163%); Energy generation & storage (+13.5x). The increase in revenues for

Automotive and automotive leasing was driven by full year sales of newly launched Model X as well

as higher deliveries of Model S (Tesla-Annual Report, 2016, pp.44). The Gross profit for 2016
increased by 73% driven by higher sales. The operating income slightly improved in 2016 but

continued to remain negative. The modest improvement was due to lower raise in R&D cost (+16%)

relative to growth in revenues. The net loss slightly improved to US$674 million in 2016 from loss

of US$888 million in 2015. The moderate improvement was due to higher operating income and

additional $98 million of loss which was reclassified and attributed to non-controlling interests and

redeemable non-controlling interests related to SolarCity’s financing arrangements. (Tesla-Annual

Report, 2016, pp.48)

RE-CASTED BALANCE SHEET

Since there were no extraordinary items, the re-casted balance sheet has no major

adjustments and represents the reported balance sheet of the company.

US$ mn Dec-14 Dec-15 Dec-16

Current Assets
Cash and Cash Equivalents $1,923.66 $1,219.54 $3,498.74
Net Receivables $226.60 $168.97 $499.14
Inventory $953.68 $1,277.84 $2,067.45
Other Current Assets $76.13 $115.67 $194.47
Total Current Assets $3,180.07 $2,782.01 $6,259.80
Long-Term Assets
Long-Term Investments $0.00 $0.00 $506.30
Fixed Assets $2,596.01 $5,194.74 $9,117.04
Intangible Assets $0.00 $12.82 $376.15
Other Assets $54.58 $78.38 $6,404.80
Deferred Asset Charges $0.00 $0.00 $0.00
$5,830.67 $8,067.94 $22,664.0
Total Assets 8

Current Liabilities
Accounts Payable $1,046.83 $1,338.95 $3,070.37
Short-Term Debt / Current Portion of Long-Term $611.10 $627.93 $1,150.15
Debt
Other Current Liabilities $449.24 $844.16 $1,606.49
Total Current Liabilities $2,107.17 $2,811.04 $5,827.01
Non-Current Liability
Long-Term Debt $1,818.79 $2,021.09 $5,969.50
Other Liabilities $642.54 $1,658.72 $4,101.87
US$ mn Dec-14 Dec-15 Dec-16
Deferred Liability Charges $292.27 $446.11 $851.79
Misc. Stocks $58.20 $47.29 $375.82
Minority Interest $0.00 $0.00 $785.18
$4,918.96 $6,984.24 $17,911.1
Total Liabilities 7
Stock Holders Equity
Common Stocks $0.13 $0.13 $0.16
Capital Surplus $2,345.27 $3,409.45 $7,773.73
($1,433.66) ($2,322.32) ($2,997.24
Retained Earnings )
Other Equity ($0.02) ($3.56) ($23.74)
Total Equity $911.71 $1,083.70 $4,752.91
$5,830.67 $8,067.94 $22,664.0
Total Liabilities & Equity 8
Source: Tesla-Annual Report, 2016, pp. 55

The company's asset base in 2016 increased by 1.8x over 2015 because of increase in Solar

energy systems and operating lease assets. Other assets like cash increased by 1.8x, receivables saw

a rise of 1.9x, and total current asset as such saw increase of 125% over 2015. On the liability side

the long term debt increased by almost 2x due to consolidation of Solarcity debt.

COMMON-SIZE INCOME STATEMENT

Common-sizing an income statement would mean displaying all the income statement items

as a percentage of sales. This analysis helps to do a time-series analysis of the numbers over the

period of time.

Year Ending (US$ mn) Dec-14 Dec-15 Dec-16

Total Revenue 100.00% 100.00% 100.00%
Cost of Revenue -72.43% -77.18% -77.15%
Gross Profit 27.57% 22.82% 22.85%
Operating Expenses
Research and Development -14.53% -17.74% -11.92%
Sales, General and Admin. -18.87% -22.79% -20.46%
Operating Income -5.84% -17.71% -9.53%
Add'l income/expense items 0.09% -0.99% 1.71%
Earnings Before Interest and Tax -5.75% -18.70% -7.82%
Interest Expense -3.15% -2.94% -2.84%
Earnings Before Tax -8.90% -21.64% -10.66%
Income Tax -0.29% -0.32% -0.38%
Minority Interest 0.00% 0.00% 1.40%
Net Income -9.19% -21.96% -9.64%

Cost of Sales have increased in relation to sales i.e. cost ratio has been increased in 2015 and

2016 compared to 2014 primarily because of change in the product mix of the company. The

company generated greater percentage of sales from lower priced vehicle models and increased

manufacturing costs related to the ramp in production of the small drive unit for dual motor Model

S vehicles and start of Model X production (Tesla-Annual Report, 2016, pp.46). However, the Cost to

sales ratio for 2016 saw a modest decline backed by lower material and manufacturing costs.

Accordingly, the gross margin i.e. Gross profit/sales declined in 2015 while saw a moderate

improvement in 2016. The R&D expenses as proportion to sales increased in 2015 because of

development and design of its new models - Model S and Model X. The proportional R&D expense

was lowered in 2016 primarily because of constant R&D expense however higher revenue derived

from commercial sales of Model S supported the R&D expenses. The SG&A as a proportion of sales

was almost stable despite of increase in SG&A in absolute terms. The Operating Profit Ratio which is

derived by Operating Income/Sales was negative for all the three years due to negative operational

income. The Operating profit ratio improved in 2016 to -9.5% from -17.7% in 2015 driven by higher

sales, and lower proportional R&D expenses. The interest expense in proportion to sales has be

steadily declining in each of the three years extending the benefit of financial leverage. Income tax

as percentage of sales has been increasing in each of the three years due to increase in taxable

income in the company's international jurisdictions. Net Profit Margin i.e. Net Income/Sales has

improved in 2016 albeit remained negative. The improvement is largely rippled down from better

revenues and better operating income coupled with classification of some portion of loss as non-

controlling interest related to SolarCity’s financing arrangements.

DUPONT ANALYSIS
 DuPont analysis breaks down the Return on equity computation to assess impact of various

factors on the ROE of the company. ROE signifies how much $ profit a company is generating over its

equity. This is one of the very important parameters for the equity shareholders to assess how much

profit their equity ownership is generating. Given the company operations are impacted by multiple

factors, doing a DuPont analysis helps the investors, analysts as well as managers to see which

factor has huge impact on ROE and which needs a correction. ROE is a product of operating

efficiency, asset use efficiency and financial leverage. Formula breakdown of DuPont is as follows

Return on Equity=Profit Margin∗Asset Turnover∗Equity multiplier

Net Income
∗Net Revenue
Net Revenue
∗Total Assets
Total Assets
ROE=
Tot al Equity

The first part of ROE is profit margin which shows the operating performance of the

company i.e.. Operating efficiency. Net Profit Margin = -674.91/7,000.13 = -9.64%

The second part is Asset turnover i.e. how efficiently the company is managing its assets and

how soon it is converting its assets into sales. This depicts the asset usage efficiency of the company.

Asset Turnover = 7,000.13/22,664.08 = 0.31x

The third part is equity multiplier i.e. how much of the money is borrowed and how much is

own equity. This depicts the leverage effect of the company. Equity Multiplier = 22,664.08/4,752.91

= 4.77x

Thus the ROE = -9.64% * 0.31x * 4.77x = -14.20%. Please note that for the profit margin of

negative 9.64%, the ROE is -14.20%, the decline is higher because of leverage effect and slightly

moderated by asset turnover of less than one. The leverage has multiplier effect on ROE by

exponentially increasing or decreasing the ROE.

RATIO ANALYSIS
Dec-14 Dec-15 Dec-16
Profitability Ratio
Gross Profit Margin 27.57% 22.82% 22.85%
EBIT Margin (5.75%) (18.70%) (7.82%)
Profit Margin (9.19%) (21.96%) (9.64%)
Return on Asset (5.04%) (11.01%) (2.98%)
Return on Equity (32.25%) (82.00%) (14.20%)
Activity Ratio
Accounts Receivable Turnover 14.11 23.95 14.02
Days’ Receivable 25.86 15.24 26.03
Inventory Turnover 2.43 2.44 2.61
Days’ Inventory 150.25 149.37 139.72
Accounts Payable 2.21 2.33 1.76
Days’ Payable 164.93 156.51 207.50
PP&E Turnover 1.23 0.78 0.77
Long-term Asset Turnover 0.55 0.50 0.31

The gross profit margin can be computed using the following formula Gross Profit/Sales.

The gross profit margin signifies how much % of revenues the company is generating by selling its

goods or services. It considers on the cost of the goods sold or services rendered. The gross profit

margin of the company declined sharply in 2015 because of launch of relatively lower priced

models like Model S and Model X however having similar costs. Thus the gross profit was declined

in 2015. However there was a miniscule improvement of meager 3 basis points in the margin for the

year 2016 driven by slightly lower manufacturing and material cost.

The EBIT Margin signifies the operating performance of the company taking into

consideration all the operating costs. It does not include the finance cost, thus signifies how much %

of revenues the company is able to generate at operating level prior including the financing or

taxation impact. EBIT margin is computed by using EBIT/Sales. The EBIT was negative for all the

three years of the company because of its differentiation strategy and continuous improvement and

new launch of products which results in higher research and development cost. The EBIT margin

for the year 2015 sharply deteriorated because of already lower gross profit coupled with higher
research and development cost towards the designing and development of company's new models -

Model S and Model X. The R&D cost increased by more than 50% in the year 2015. The margins

improved in 2016 despite being negative because of lower growth in R&D expenses in proportion to

sales. The R&D expenses increased by 16.2% while the sales increased by 73.0%.

Profit Margin or Net Income Margin denotes the pure profitability of the company after

including all the costs - direct, indirect, operational, financial, regulatory etc. The ratio is arrived by

dividing Net Income after taxes by sales. In-line with negative operating income, the net income was

also negative for all the three years, thus the net income margin was negative for all the three years.

The net income drastically deteriorated in the year 2015 due to the cascading effect of lower gross

profits and higher R&D expenses. The margin in 2016 improved because of lower R&D, foreign

exchange gains of $111.3 mn from loss of $41.7mn in 2015 and classification some portion of loss

as non-controlling.

Return on asset depicts the rate of return the company is generating with respect to its

assets i.e. rate of return for all the stakeholders - debt and equity. This exhibits the profitability of

the company in terms of total assets. Return on assets can be computed by dividing net profit after

tax by total assets. Alternatively some analyst compute return on average asset (ROAA) where the

denominator is average of asset balance of current year and previous year. We will focus on ROA. In-

line with negative earnings, the ROA of the company was negative for all the three years. The ROA

deteriorated in 2015 in accordance with the sharply declined net income. For the year 2016, the

ROA improved from negative 11.0% to negative 2.9% due to increase in asset base by 180.9%

coupled with better net income in 2016.

Return on equity is another variant of rate of return which depicts the rate of return

generated for the equity holders of the company and not all the stakeholders. Return on equity can

be computed by dividing net profit after tax by total equity. Alternatively some analyst compute
return on average equity (ROAE) where the denominator is average of equity balance of current

year and previous year. We will focus on ROE. ROE has more variability when compared to ROA

because of smaller denominator base. The ROE saw a massive decline to 82.0% in 2015 from 32.3%

in 2014, impacted by poor profitability of the company. For the year 2016, the ROE sharply

improved to negative 14.2% because of higher equity base to absorb the losses. The equity

increased by 3.3 times due to fresh share issuance upon acquisition of SolarCity (Tesla-Annual

Report, 2016, pp.58).

Accounts receivable turnover signifies the efficiency of receivables management and

represents the average number of times the receivables is converted into cash in any year. Higher

the turnover better it is as it signifies efficiency of the firm. It is computed by dividing credit sales by

receivables. In absence of information, we will use Net Sales/Receivables. The receivable days is

average number of days the customers take to repay the credit sales and is computed as

365/receivables turnover. The turnover reduced in the year 2016 resulting in average receivable

days to increase from 15.2 days to 26.0 days. The reduction in turnover is primarily driven by 1.95x

increase in receivables corresponding to 73% rise in sales.

Inventory turnover is also an activity ratio which signifies the efficiency of the firm in its

inventory management. It depicts how soon the firm converts its inventory into the finished goods.

Higher the turnover is better for any firm. It is computed by cost of sales/inventory. The Inventory

days is average time taken for converting Inventory into the finished goods and is computed by

dividing 365 by inventory turnover. The inventory turnover saw a decent improvement in the year

2016.

Accounts payable turnover depicts the average number of time the purchases are being paid

in a year. Lower the ratio better it is for the firm from point of view of liquidity. However very low

turnover may reduce credibility of the firm in terms of its supply chain management as the
suppliers may least prefer to do business with the firm. The ratio is computed as

purchases/payables but in absence of information we use cost of sales/payables. The Payable days

represents the number of days a firm takes to repay its suppliers and is computed as 365/payables

turnover. The payables turnover has reduced in the year 2016 resulting in increase of payable days

to 207.5 days from 156.5 days.

The PP&E turnover signifying how many times of PP&E the firm is able to generate sales.

This ratio is computed by dividing net sales by PP&E. The ratio has drastically declined in the year

2015 and 2016. This is because of 100.0% rise in PP&E for 2015 and further 75.5% rise in PP&E

due to start of manufacturing of Model S and Model X.

Similarly the Long-term asset turnover, which signifies how many times of long term asset

the firm is able to generate sales, is computed by dividing net sales by long term assets. This ratio

has been declining each year representing the growth phase of the company. The company has been

investing in long term assets related to development and manufacturing of new models. Also the

ratio has been less than one which represents the capital intensiveness and asset-heavy financial

structure of the company.

RISK ANALYSIS
Non-Financial Risk
The company is exposed to the key risk of adherence to the timelines. Timelines referring

the development and manufacturing of new models, launch of new products and also mass level

manufacturing of the products. Any delay in development or manufacturing of the products will

significantly harm the financial and market position of the company. Also, Tesla is dependent upon a

lot of single-source suppliers, and inability of those suppliers to supply quality products at

economical prices would have a adverse effect on the company. The company deals in a technology

product whose viability largely depends on the success of the new technology like storage batteries.
Any lower than anticipated performance of the new technology will hamper the marketing of those

products.

Financial Risk
Dec-14 Dec-15 Dec-16
Current Ratio 1.51 0.99 1.07
CA/CL
Quick Ratio 1.06 0.54 0.72
(CA-Inventory)/CL
Cash Ratio 0.91 0.43 0.60
(Cash Equivalents/CL)
Liabilities -to-Equity 5.40 6.44 3.77
Liabilities/Equity
Capital Structure Ratio 2.40 3.05 3.18
Asset/Debt
Interest Coverage -1.82 -6.37 -2.75
EBIT/Interest

The financial position of the firm is deteriorating in terms of Current, Quick and Cash ratio.

The ratios declined in 2015 mainly due to start of production of Model S and Model X. The position

is alarming even for 2016, where the ratios marginally improved over 2015, albeit continued to

remain at lower levels. The firm is in growth phase and the liquidity ratios would be stressed until

the growth phase stabilizes or the revenues start funding the capital expenditure. The solvency

ratios in form of Asset-to-Debt and Liability-to-Equity improved in 2016 but the Interest coverage

ratio which signifies earning capacity of the firm as the number of times of Interest. The ratio is

negative, which denotes high risk for debt holders, the firm is at negative operating income unable

to even cover its interest payments.

FORECASTING

SUSTAINABLE GROWTH
Sustainable growth rate is the long-term growth rate in the cash flows of the company. It

takes into account the cash retained by the company in form of retention ratio and return on the

equity i.e. profit on that retained earnings. The formula for sustainable growth rate "g" is

g=ROE∗(1−DPR)

ROE of the company as computed in the DuPont analysis is -14.20% while the company has

not paid any dividends ("Tesla Dividend Payout Ratio (TSLA)"). The negative earnings and no

dividend payout makes this indicator meaningless. This ratio would be meaningful once the firm

starts making profits.

WEIGHTED AVERAGE COST OF CAPITAL

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing model uses the capital market return and relative riskiness of the stock

and risk free rate to estimate the cost of equity. Cost of Equity under CAPM = Rf + β*(Rm-Rf) where

Rf is risk free rate, Rm is Market return and β is Beta

We would consider yield on 10 year US Government bond as the Risk free rate . The 10 year

US Bond yield is at 2.34% ("United States Rates & Bonds"). Considering S&P500 as proxy for

market, we use last 10 years average return on S&P as market return which is at 9.90% ("S&P 500

Annual Total Return (Yearly)") . The Beta is 0.73 ("TSLA : Summary For Tesla, Inc. - Yahoo

Finance").

Thus the cost of equity = 2.34%*0.73*(9.90%-2.34%) = 7.86%

Cost of Debt
Average cost of debt can be ascertained by dividing interest expense/total debt where total

debt equal short term debt plus long term debt. Average interest cost for 2016 = 198.81/

(1150.15+5969.50) = 2.79%. Also since the company operates into multiple regions and also has

tax credit towards the research and development, the effective tax rate is very low compared to

other firms in US. The average effective tax rate can be computed by dividing average income tax

provision by average earnings before tax. The average effective tax rate for last three years is 2.58%.

The post tax cost of debt = 2.79%*(1-2.58%) = 2.72%

Capital Components
The weights of capital should be arrived using market values of capital. Since the debt is not

traded, the book value of debt is considered. While for value of equity, the market capitalization

needs to be used. The market capitalization as of November 24, 2017 is US$52,928 million ("TSLA :

Summary For Tesla, Inc. - Yahoo Finance").

US$ mn %
Debt $7,119.65 11.86%
Equity 52,928.00 88.14%

Weighted Average Cost of Capital

WACC = Cost of Debt * Weight of Debt + Cost of Equity *Weight of Equity

= 11.86%*2.72% + 88.14%*7.86%

= 7.25%

Tesla has cost of capital of 7.25%. This represents the hurdle rate for the firm for capital

budgeting decisions. It would accept the project generating returns more than the cost of capital.
5-YEAR INCOME STATEMENT FORECAST
Key Assumptions
Unit Comment
Revenue US$ 11,800 Based on consensus estimated. The revenue is lower than growth
growth for mn anticipated due to delayed production timelines
2017
Revenue US$ 20,000 Based on consensus estimated. The estimate factors additional
Growth for mn revenue due to launch of new vehicles
2018
Revenue % 35% Based on assumption of new launches
growth
thereafter
Cost of % 77.15% Based on 2016 numbers which factors the new product mix of Tesla
Revenue having economical cars
R&D Expenses % 14.73% Based on average of previous three years, this is because 2015 factors
the cost towards new product development
SG&A % 20.71% Based on average of previous three years, this is because 2015 factors
the cost towards new product development
Add'l US$ 0 Assumed it be zero. As it is difficult to forecast non-operating items
income/expen mn
se items
Interest Rate % 2.79% Based on effective interest rate for 2016
Debt % 102% Assumed to increase in proportion to sales. This is because the firm is
under Growth phase and sales are good proxy for capex requirement
Tax % 3.58% Effective tax rate for 2016, despite of losses, provision for taxes is
created due to deferred taxes and foreign income

With the delays in the product launch of Model X resulting analyst in mixed views. Adam

Jonas, Analyst at Morgan Stanley is very positive on the sales growth of Tesla (DEAGON, BRIAN)

while other analysts are concerned of the change in production guidance (Ferris, Robert). Thus the

sales estimates for the first two years are based on analyst consensus while for the remaining three

years, half of the analyst forecasted growth is being assumed. ("TSLA - Tesla Forecast -

Cnnmoney.Com").

Cost of revenue and other costs are assumed based on historical values. Interest is

forecasted based on effective interest rate and forecasted debt balance. Given the firm is under the

growth phase, we assume the debt to increase in proportion to Capex which in turn shall increase in
proportion to sales. Thus debt is forecasted based on proportion of sales. Tax rate is forecasted

based on effective tax rate for 2016. Despite of being in losses, a provision for tax is created due to

deferred tax assets and foreign income.

Year Ending Dec-17e Dec-18e Dec-19e Dec-20e Dec-21e

(US$ mn)
Total Revenue $11,800.00 $20,000.00 $27,000.00 $36,450.00 $49,207.50
Cost of Revenue ($9,104.16) ($15,430.78 ($20,831.55 ($28,122.60 ($37,965.51
) ) ) )
Gross Profit $2,695.84 $4,569.22 $6,168.45 $8,327.40 $11,241.99
Operating Expenses
R&D ($1,738.24) ($2,946.17) ($3,977.33) ($5,369.40) ($7,248.69)
SG&A ($2,443.66) ($4,141.80) ($5,591.44) ($7,548.44) ($10,190.39
)
Operating Income ($1,486.07 ($2,518.76) ($3,400.32) ($4,590.43) ($6,197.08)
)
Add'l income $0.00 $0.00 $0.00 $0.00 $0.00
Earnings Before ($1,486.07 ($2,518.76) ($3,400.32) ($4,590.43) ($6,197.08)
Interest and Tax )
Interest Expense ($335.13) ($568.02) ($766.82) ($1,035.21) ($1,397.54)
Earnings Before Tax ($1,821.20 ($3,086.77) ($4,167.14) ($5,625.64) ($7,594.62)
)
Income Tax ($65.15) ($110.42) ($149.07) ($201.24) ($271.67)
Minority Interest $0.00 $0.00 $0.00 $0.00 $0.00
Net Income ($1,886.34 ($3,197.19) ($4,316.21) ($5,826.88) ($7,866.29)
)
Debt $12,001.46 $20,341.46 $27,460.98 $37,072.32 $50,047.63
The forecast assumes the company to continue burning the cash to capture the sales growth.

This is mainly due to high cost of sales which is on higher side due to change in the product mix of

the company.
REFERENCES
"About Tesla | Tesla." Tesla.Com, 2017, https://www.tesla.com/about.

"Elon Musk | Tesla." Tesla.Com, 2017, https://www.tesla.com/elon-musk.

"Tesla - Definitive Proxy Statement." Ir.Tesla.Com, 2017, http://ir.tesla.com/secfiling.cfm?

filingID=1193125-17-130746&CIK=1318605.

Morris, David. "Tesla Dominates Audi, BMW, And Even Mercedes In 2015 Luxury Sedan

Sales.." Fortune, 2017, http://fortune.com/2016/02/11/tesla-best-selling-luxury-sedan/.

Cobb, Jeff. "Tesla Model S Is World's Best-Selling Plug-In Car For Second Year In A Row -

Hybridcars.Com." Hybridcars.Com, 2017, http://www.hybridcars.com/tesla-model-s-is-worlds-

best-selling-plug-in-car-for-second-year-in-a-row/.

"Tesla, Inc.." En.Wikipedia.Org, 2017, https://en.wikipedia.org/wiki/Tesla,_Inc.

Cobb, Jeff. "Tesla Model S Is Second Plug-In Car To Cross 150,000 Sales Milestone -

Hybridcars.Com." Hybridcars.Com, 2017, http://www.hybridcars.com/tesla-model-s-is-second-

plug-in-car-to-cross-150000-sales-milestone/.

"Institutional Investments - Benefits." Referenceforbusiness.Com, 2017,

http://www.referenceforbusiness.com/encyclopedia/Inc-Int/Institutional-Investments.html.

"Tesla - Annual Report, 2016." Ir.Tesla.Com, 2017, http://ir.tesla.com/secfiling.cfm?

filingid=1564590-17-3118&cik=1318605.

"Tesla And Porter's Five Forces." Prezi.Com, 2017, https://prezi.com/odfko5i1kaqp/tesla-

and-porters-five-forces/?webgl=0.
 Kissinger, Daniel. "Tesla Motors, Inc.’S Five Forces Analysis & Recommendations (Porter's

Model) - Panmore Institute." Panmore Institute, 2017, http://panmore.com/tesla-motors-inc-five-

forces-analysis-recommendations-porters-model.

Musk, Elon. "The Secret Tesla Motors Master Plan (Just Between You And Me)." Tesla.Com,

2016, https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me.

Dutta, Arieez. "A Deep Dive Into Tesla Business Strategy | Feedough." Feedough, 2017,

https://www.feedough.com/tesla-business-strategy-and-business-model/.

Schultz, E.J. "Tesla Still Doesn't Need Paid Advertising To Make Sales." Adageindia.In, 2017,

http://www.adageindia.in/marketing/cmo-strategy/tesla-still-doesnt-need-paid-advertising-to-

make-sales/articleshow/59903856.cms.

"Tesla Dividend Payout Ratio (TSLA)." Gurufocus.Com, 2017,

https://www.gurufocus.com/term/payout/TSLA/Dividend%252BPayout%252BRatio/Tesla+Inc.

"United States Rates & Bonds." Bloomberg.Com, 2017,

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

"S&P 500 Annual Total Return (Yearly)." Ycharts.Com, 2017,

https://ycharts.com/indicators/sandp_500_total_return_annual.

"TSLA : Summary For Tesla, Inc. - Yahoo Finance." Finance.Yahoo.Com, 2017,

https://finance.yahoo.com/quote/TSLA/.

DEAGON, BRIAN. "Bullish Tesla Report Forecasts Huge Growth Stemming From Model 3 |

Stock News & Stock Market Analysis - IBD." Investor's Business Daily, 2017,

https://www.investors.com/news/technology/bullish-tesla-report-forecasts-huge-growth-due-

from-model-3/.
 Ferris, Robert. "Tesla Shares Drop As Wall Street Analysts Have Had Enough Of Musk's

Funky Forecasts." CNBC, 2017, https://www.cnbc.com/2017/11/02/tesla-analysts-have-had-

enough-of-musks-funky-forecasts.html.

"TSLA - Tesla Forecast - Cnnmoney.Com." Money.Cnn.Com, 2017,

http://money.cnn.com/quote/forecast/forecast.html?symb=tsla