Tesla Inc.

Company Overview: Tesla Inc. (NASDAQ: TSLA) is engaged in the design, development, manufacturing, and sales business of automotive, which accounts for 94% of FY20. The automotive segment includes a portfolio of all-electric vehicles where revenues are induced by way of direct sales, leasing, and regulatory credits. Revenues from the energy generation & storage segment represent the sale of solar energy systems and energy storage systems to residential, small commercial, and large commercial and utility grade customers. The segment constitutes ~6% of FY20 revenues.

TSLA Details

Fast-Paced Construction of Gigafactory Underway to Uplift Production: TSLA has progressed construction of Gigafactory Berlin and Gigafactory Texas coupled with the expansion of Gigafactory Shanghai to satisfy the on-track production and deliveries in late 2021. TSLA improved its domestic supply sourcing ratio to over 90% with the recent developments of the Model Y ramp in Shanghai. Moreover, Panasonic partnership with Gigafactory Nevada to supply battery cells may add further economies of scale and drive operational efficiency.

Historical Financial Trend:

TSLA clocked healthy revenues over the past five years aided by a ramp-up in vehicle production, continued R&D investments, proliferation in battery technology for electric vehicles. The company, over time, invested in sourcing capabilities that helped in bringing cost efficiencies which lifted EBITDA growth.

Figure 1. 5-Year Key Financial Summary:

Source: Company Reports

A Glance on Quarterly Performance:

Revenues surged substantially by 74% yoy growth, reaching ~$10.39 billion as a result of substantial growth in vehicle deliveries, partially offset by a 13% yoy decline in average selling price. Moreover, operating income improved to $594 million, relative to $283 million in Q1FY20, resulting in 5.7% operating margins. This was predominantly driven by increased volume, regulatory credit revenue growth and product cost reduction, partially offset by a lower ASP, increased share-based compensation, higher supply chain costs and R&D investments. Further, Model S and Model X changeover costs negatively impacted both gross profit as well as R&D expenses. Net income increased from ~$16 million to ~$438 million on a pcp basis. Moreover, cash flow from operations increased to an inflow of ~$1,641 million in the quarter relative to an outflow of ~$440 million in Q1FY20. For the period, TSLA stands cash-rich and profitable to feed on future expected capital expenditure.

Figure 2. Quarterly Performance Metrics:

Source: Company Reports

On a Balance Sheet front (as of 31 March 2021), TSLA exhibits strong funding and liquidity position with cash and cash equivalents amounting to ~$17.14 billion with a sustainable debt level. Long-term debt and finance leases decreased from ~$9.56 billion as of 31 December 2020 to ~$9.05 billion as of 31 March 2021.

Full-year FY20 Performance and a Transition to Profitability

Along the year, TSLA achieved industry-leading operating margins of 6.3% despite an increase in share-based compensation to $1.7 billion. In addition, the company ramped up Model 3 production capacity in China to 5,000 vehicles per week, and Model Y production commenced at Gigafactory Shanghai. In FY20, gross margins increased to 25.6%, up by 437 bps YoY, and positive operating margins were reported at 6.3%, a significant improvement of 660 bps YoY. Further, Free Cash Flow improved by an astounding 158% and stood at ~$2.79 billion.

Top 10 Shareholders: The top 10 shareholders together form ~41.31% of the total shareholding. Musk (Elon R) and The Vanguard Group, Inc. hold a maximum stake in the company at ~17.76% and ~6.08%, respectively.

Figure 3: Top 10 Shareholders

Key Metrics: A surge in production and delivery in the automotive segment, accompanied by recovery of Tesla Solar deployment, TSLA reports strong top-line growth with improved margins caused by technological advancements and establishing economies of scale across China production facility. It had a healthy cash balance that was resulting in an improvement in the current ratio.

Figure 4. Key Financial Metrics

Outlook: With the recent announcement of updated versions of Model S and Model X, TSLA is focused on improving and building capacities via establishing Gigafactory Berlin and Gigafactory Texas. Further, cost reduction strategies and additional localized procurement are the key aspects to drive up product affordability and hence product demand. Further brand awareness with improved vehicles’ functionality on technological grounds is expected to drive up demand in SUV and sedan segments. However, COVID-19 uncertainties may pose a downshift in demand and operations as experienced in FY20.

Key Risks: Considering the frequent changes in economic conditions and regulations due to COVID-19 impact, TSLA is exposed to cyclical distress. Operational risks associated with production across Gigafactories may aggravate delays in launching and production ramp-up, which may drive up manufacturing costs to uncontrolled levels. TSLA further face challenges in building up global product sales, delivery, and installation capabilities due to a lack of independent dealer networks.

Valuation Methodology: Price to Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: TSLA has delivered 3-month and 6-month returns of ~-15.12% and ~+16.21%, respectively. The stock is trading above the average of the 52-week high price of $900.40 and the 52-week low price of $157.00. On the technical front, the stock has a support level of ~ US $499.00 and a resistance level of ~US $780.00. We have valued the stock using Price-to-sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a discount compared to its peer average Price/Sales (NTM Trading multiple), considering possibilities of operational breakdowns as realized in the past, expected delays and high manufacturing costs, frequent changes in the macroeconomic scenario might affect the volumes and growth plans. For this purpose, we have taken peers such as Fisker Inc. (NYSE: FSR), Workhorse Group Inc. (NASDAQ: WKHS), Arcimoto Inc. (NASDAQ: FUV), to name a few. Considering ramp-up plans, consistent revenue and profitability trend, solid liquidity, we give a “Buy” recommendation on the stock at the current market price of US $606.44, up ~4.4% on May 24, 2021.

Technical Overview

Data Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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