Tesla Inc. - Tsla Long Term Analysis

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Investment Company: Jefferies

Equity reports type: Initiating Coverage

Equity research report: Tesla Inc. (TSLA) Initiate at BUY: Survey Paves Road to 500,000 Cars ex China, 60% 5YR EBITDA CAGR

Equity Analyst: Dan Dolev

Equity Associate: Trevor Young CFA

Time: May 5, 2015 

Company Background

TSLA. is an American company founded in 2003 and is headquartered in Palo Alto, California, USA. TSLA. designs, develops, manufactures, and sells high performance, luxury, fully electric passenger vehicles, electric vehicle powertrain components, and stationary energy storage systems. TSLA sells its vehicles directly to consumers globally through its company owned stores and galleries, and via phone and internet purchases. The company competes with other automotive original equipment manufacturers (OEMs) as well as other automotive component suppliers and stationary energy storage manufacturers. TSLA manufactures/assembles its vehicles in California and the Netherlands, and sells its vehicles in the US, Canada, the Netherlands, UK, Germany, Australia, Japan, China, Hong Kong, and other countries.

Long term Analysis

TSLA Price target at $350.00 and Price at $230.51. Its long term financial model drivers with an Organic Revenue Growth 40-60% and an Adj. EBITDA Margin Expansion 500-750bps. Comparing to its competitors, TSLA have an EV/EBITDA of 15x and BMW of 8x. According to the Catalysts, TSLA Further penetration into high growth in China accelerates revenue growth, Production growth accelerates faster than expected and greater demand for Model X/III than current expectations.

Survey

TSLA is a leader in the battery electric vehicle (BEV) automotive segment, having demonstrated sizeable demand for luxury electric vehicles. For example, its model S deliveries grew from 2,636 in 2012 to 31,655 in 2014. Nevertheless, with an average selling price 3x the national average ($100,000 vs. $31,000), “range anxiety” concerns (with just 380 Supercharger stations and a vehicle range of 240-270 miles, owners have to plan trips carefully), and early challenges in China, many investors and analysts have raised concerns about TSLA’s ability to produce and sell its target of 500K cars per annum by 2020. Jefferies did a survey on TSLA selling 500,000 cars per year by 2020 ex china on 700 US consumers in the market to purchase a new car in the next 1-2 year.

In the survey it was uncovers that 68% of survey respondents would consider an alternative fuel car for their next vehicle, and 7.1% would consider a TSLA, 21% Toyota, 8.6% Ford and 64% others. Jefferies does not take into account any pricing concerns, competition or simple conservatism. The analysts use more sensible approach estimate LMC’s of 35 million vehicles sold in North America and Western Europe because they believe that both North America and Western Europe where income levels, purchasing power and automotive preferences are roughly similar. So therefore the analysts haircut this figure by 50% to create a sufficient margin of error. This results in a total addressable market of about 17.5 million vehicles. They apply 7.1% survey penetration rate to 17.5 million results in 1.2 million vehicles.

With 50 respondents, the survey shows that only about 42% of potential TSLA buyers are also willing to pay $40,000 plus for a TSLA

The Battery electric vehicle (BEV) are gaining share within the alternative category in US market. US sales data suggests that BEV sales have grown at an 85% CAGR since 2011, reaching just over 63K vehicles sold in 2014 with an estimated 17,400 cars delivered in North America, Jefferies estimate TSLA likely accounted for one quarter of US BEVs. While lower gas prices may impact the category, Jefferies survey shows that gas savings are not a key consideration for potential TSLA buyers and gas prices only rank third in overall importance for likely TSLA customers, lagging other virtues such as performance and environmental consciousness.

The survey also show that TSLA has a distinct competitive advantage with their battery, their Model III (D-midsize) which is expected to debut in 2017, should grow TSLA’s expected total addressable market (TAM) by nearly 4x or 2x the combined premium SUV/midsize market. TSLA’s Investment in autonomous cars should pay off as it helps boost interest in the brand, Jefferies survey uncovers that although a greater proportion of potential TSLA customers expressed some interest in driverless cars, 66% interested and 34% not interested, the ratio was also favourable amongst non TSLA buyers (51%, : 49%). Undoubtedly, TSLA’s extensive research in this field e.g. its autopilot system, which is being progressively enabled over time through over the air software updates, and includes both safety features, such as collision warning systems and automatic braking, and convenience features such as traffic aware cruise control could be a key selling point in the coming years.

Jefferies last survey is TSLA’s production growth, compared to other brands TSLA exceeded its delivery guidance in each quarter by at least 9%, resulting in deliveries 12% higher than initial guidance for the fiscal year. At the end of 2013, TSLA produced 600 vehicles per week, 800 vehicles per week by the end of 2Q14, and 1,000 plus per week by the end of 2014. Management estimates that it can produce 2,000 per week by the end of 2015. TSLA original equipment manufacturer production (OEM) grow from 55,030 vehicles to 500,000. Whereas other brands like BYD Auto, which from 2005-2010 grew its Asia Pacific production from 11,000 vehicles 520,000 vehicles, as well as Daimler (Mercedes-Benz), which grew its AP production from 2006 to 2011 from 13,000 vehicles to 155,000.

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