Tesla Preview: Assessing Fundamental Value

Loading...
Loading...

Summary

We preview Tesla Motors Inc TSLA's Q1 2015 earnings release by assessing fundamental value. Even though we like the company's technology, our models indicate that TSLA is too expensive for fundamental investors at $232.95. With a mean projected value more than 22% below the current price, only investors seeking high-risk opportunities should hold or buy Tesla shares.

Tesla is in an extreme growth phase and the company's cost structure will undergo substantial alteration in coming years. Much of the Tesla's value is therefore based on speculation of future results. Indeed, the “no growth value” of Tesla which strips out speculative value is only $30.17 according to our models. Clearly, the market is not concerned with the non-growth case. Tesla is a risky story and the stock has a high beta, so we use a required rate of return of only 10.5%. Our models suggest that the current market price at $232.93 implies 9.31% residual earnings growth at our require rate of return. For long term residual earnings growth to be zero, the required rate of return would have to be approximately 1.5%.

In our Monte Carlo simulation, we enter 10.5% require rate of return, a very aggressive range of residual earnings growth from 8.5% to 9.5%, a wide rage of 2015 projected EPS from -$2.30 to $2.70 and 2016 projected EPS from $1.50 to $5.85. Our Monte Carlo simulation estimates a mean stock value of $180 dollars, 22.9% below the current stock price of $232.95. Note that the Monte Carlo distribution skews to the left, indicating asymmetric upside potential. Nonetheless, even extremely bullish earnings forecasts and long term residual earnings growth assumptions are insufficient to justify Tesla's lofty share price to fundamental value investors.

Company Background

Tesla Motors is an auto manufacturer that designs and markets electric vehicles (EV) and powertrain components. Unlike conventional manufacturers, the company has its own network of dealerships and supercharger stations. Tesla is currently selling the second generation of its EV called the Model S. The company sold around 67,000 Model S vehicles since the inception of deliveries back in 2012. Two new vehicles, Model X and Model 3, are slated to launch in 2015 and 2017 respectively. In May 2015, Tesla announced a residential battery called Powerwall available in either 7kWh or 10kWh sizes. Powerwall is seen as an important element in the propagation of residential and solar power generation. Tesla is also constructing a lithium-ion battery factory called Gigafactory with partners. Gigafactory will be able to produce battery packs at a significant discount to the current average unit cost and is slated to open by 2017.

Tesla’s net sales were approximately $3.2 billion during 2014. The company generated 96% of that revenue from vehicles, options and related sales. Sales of powertrain components contributed 4% of the company’s total sales during 2014. Q1 2015 deliveries exceeded 10,000, which is 500 units above guidance and a 55% increase versus the Q1 2014.

Bull Case

Tesla is the market leader in electric vehicle technology. They have first mover status and a very strong brand. Advances and technology and increasing environmental concerns bode well for the electric vehicle market, and Tesla is well positioned to capitalize on growth in the space. The company has exhibited sustained strong growth. Following 59% top line growth in the full year 2014, Tesla announced a Q1 2015 unit sales increase of 55%. Sales will be further bolstered with the introduction of the Model X crossover SUV in late 2015. Tesla's Gigafactory is an important step to driving down production costs in the future, allowing the company to save an estimated 30% in average unit manufacturing costs. The Powerwall residential and business battery product is a shift to an adjacent market with strong growth drivers. Moreover, diversification into residential and business battery market makes the Gigafactory a less risky endeavor.

Bear Case

Loading...
Loading...

In the short term, losses are accelerating. Analysts expect loss per share of $0.50 in Q1 2015 versus a loss of $0.12 one year ago. The global auto market is highly competitive. While Tesla has enjoyed first mover status and unrivaled technology to date, other manufacturers are working on developing and releasing electric vehicles of their own. BMW already has the i3 on the market and is planning to introduce i7 to directly compete against Tesla. Audi, Mercedes, Toyota, GM, Hyundai and Porsche are also planning to introduce EVs of their own. Tesla does not have a low-price model, which limits their addressable market.

Discussion

Even with extremely optimistic model parameters, Tesla still looks too expensive at $232.95. As noted, the company will face significant operational challenges to achieve these ambitious targets. Value investors concerned only with fundamentals should not have a position in Tesla. The uncertainty regarding the company's future operations and the 23% cushion relative to our Monte Carlo simulation cause us to hesitate recommending a short.

For Q1 2015, consensus estimates call for $1.04 billion in revenue and loss per share of $0.50. Investors should look out for details on the Model X launch, which is slated for the second half of 2015. Investors should also be alert for changes to sales guidance. Tesla needs to sell 12,000 in Q2 to reach its first half 2015 implied sales guidance, which will require some acceleration. Comments on the new Powerwall products and how they fit in with existing business are another important topic to watch in the earnings release and conference call. Finally, investors should look out for any discussion of plans for financing. Tesla is burning cash and needs to have a reliable and cost effective way to finance growth of a capital intensive business.

Contributors: Ryan Downie and Soid Ahmad

Loading...
Loading...
Posted In: PreviewsTrading Ideas
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...