2010 Goldman Sachs Case Competition
Team 37 Presentation
Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu
Overview of Tesla
Tesla is a vertically-integrated new-technology automobile firm
Design
Engineering
Manufacturing
Distribution
Sales
Integrated Automobile Firm
Core Competency
Sales and Distribution
In-house processing
from start to finish
Powertrain
technology
Unlike its rivals, Tesla
owns its dealerships
Government Backstop
Government support is mutually-beneficial
Government
Political points
• Goal: re-ignite, prop up automobile industry
• Cheap loans are an indirect government subsidy
• Score political points via “green tech” and “jobs”
• Political suicide to let Tesla fail and default
• Loan guarantees incur zero upfront cost
Auto industry
Green
Investments
Tesla
• Goal: to be green leader in auto industry
• Expensive investments mitigated by cheap debt
• Government support lends credibility to Tesla
• Loan guarantees encourage bank lending
Government’s interests are directly aligned with Tesla’s
Jobs
Assessment of Forecast
Is management’s forecast realistic?
Revenue
Units Sold (Model S)
(in millions)
$2,416
$2,010
30
EBITDA Margins
(in thousands)
22.9%
16.5%
20
15.3%
12.2%
$782
Industry
Average
11.4%
10.1%
10
5.8%
$142
0
2011E
2012E
2013E
2014E
2012E
2013E
2014E
Weighted ARPU
Model S Sales Projection
EBITDA Margins Optimistic
• $84,716 in 2013
• 20,000 annual target
• Management forecast puts
• $84,801 in 2014
• Comparable to other
premium sedans
beginning 2013 plausible
• <1% of global premium
sedan market
• Mass production at NUMMI
EBITDA margins at 16.5%
• Median industry margins 11.4%
• Full integration may facilitate
5% additional margin
Upside and Downside Risks
Opportunities and risks associated with valuation and IPO
Opportunities
Risks
Superior Technology
From Niche to Mass Production
• Industry leader in EV powertrains, car batteries
• Vehicle performance on par with Mercedes
• The Model S is expected to be high-volume
• Unrealistic production plan with current facilities
Public Validation
Expansion Uncertainties
• Low-interest DOE loan provides financial health
• In-line with green jobs agenda
• Uncertainty in 2012 debut of Model S
• Design specs are still pending final review
Seasoned Management
Lack of Infrastructure
• Veteran executives with rich history of innovation
• Experienced in partnering with industry leaders
• Lack of ubiquitous charging stations inconvenient
• Public policy unable to match Tesla’s ambitions
Unrivaled Brand Recognition
Unclear Future Competitive Landscape
• Long waitlist for cars not available until 2012
• Large down payments secure consumer loyalty
• Established, well-funded rivals expected to enter
• Disruptive technologies may alter landscape
Assessing IPO Need
An IPO is crucial to Tesla’s success
Why an IPO? Why now?
The IPO is necessary because even with DOE’s generous loans, Tesla still
needs critical cushion and financing to successfully launch the Model S by 2012
In full compliance with DOE
terms and company needs
* Detailed projections included in appendix
IPO Timing
Recent IPOs have been grossly underpriced
Year-to-Date Monthly IPOs
(in millions)
European Debt Crisis… Overblown
$2,573
• Tesla is largely an American company
• Tesla targets the affluent… least affected
$1,345
$1,218
• DOE loan unaffected by overseas crisis
$1,008
$861
Jittery Capital Markets
Jan
Feb
Mar
Apr
May
• S&P 500 has fallen 10% since early April
• IPO volume peaked in March; at year lows
IPO Pricing Trends
• Increases Tesla’s cost of equity
100%
75%
But,
50%
Tremendous IPO Mis-Pricing
25%
• >40% of IPOs are under-priced
0%
Jan
Below
Feb
Mar
In-Range
Apr
Above
May
• IPO amounts should be significantly higher
• Strong IPO possible despite economic woes
Strategic Capital Raising
Tesla should plan its capital raising strategically
Phase 1
Phase 2
Phase 3
Initial Public Offering
Secondary Offering
Secondary Offering
• Amount: $175m
• Amount: $85m
• Amount: $50m
• Jun-Aug, 2010
• Jun-Aug, 2012
• Jan-Mar, 2014
DOE Loan Draw
DOE Loan Draw
DOE Loan Pay-down
• Amount: $165m
• Amount: $225m, $75m
• ($36m), ($97m), ($121m)
• Jun, 2010
• 2011, early 2012
• Dec 2012, 2013, 2014
Debt Financing (2010-2012)
Secondary Offering (2012)
Secondary Offering (2014)
No additional debt beyond DOE loans due to low credit rating. Pay down debt
as FCF explodes to improve capital structure, minimize idle cash
Extra financial cushion for the Model S debut in 2012. Imminent Model S
launch increases investor confidence and our valuation
To comply with DOE loan restrictions on
liabilities/shareholder’s equity ratio starting in 2014
Discounted Cash Flow
Computing the value using DCF
Revenue and CFO
3,000
(in millions)
Revenue
CFO
2013
2014
2,000
1,000
0
2009
2010
2011
2012
-1,000
DCF
400
We apply a dynamic Re as we believe earnings
normalization and large cash flows starting in 2013
will reduce risks to slightly above industry averages
Growth
Terminal Growth Rate
(in millions)
200
0
-200
-400
2010
Key Assumption
2011
2012
2013
2014
5%
Multiples Analysis
Comparables analysis
EV/EBITDA Multiple
EV/Sales Multiple
* Weighted average of each company from 2010-2013
* Weighted average of each company from 2010-2013
Multiples Valuation
(in millions)
Summary
Tesla should proceed with an IPO
IPO Need
Tesla Deserves a Premium
• Tesla needs time-sensitive capital
• Unrivaled technology and designs
• Huge potentials with Powertrain
• DOE loans, while hefty, are inadequate
• Expansion scheduled for 2012
Strategic Capital Raising
• Second-to-none brand recognition
Potential Risks
• Raise no more than required amount
• Compliance with DOE terms necessary
• Secondary offerings in 2012, 2014
• Model S rollout is delayed
• No experience with mass production
• Margins fail to meet expectations
Sensitivity Analysis (DCF valuation in millions $)
Terminal Growth
Cost of equity 2015+
15%
17.50%
20%
22.50%
4%
1251
996
823
710
5%
1509
1152
933
784
6%
1905
1368
1068
877
7%
2585
1684
1251
996
Appendix
Key Assumptions
Key assumptions and methodologies
• Dynamic Equity Cost of Capital (Slide 9)
• We believe that Tesla’s high cost of capital (25%) is only applicable until it begins generating sustainable FCFs,
starting in 2013. If Tesla reaches that point, its risks are significantly reduced
• Therefore, Tesla’s cost of capital should only be a little above industry averages as its risk level is not necessarily
higher, and it has a much more inexpensive source of debt financing than its peers.
• Lack of Additional Capex Investment Opportunities
• Tesla will have large free cash flows starting 2013 and cheap debt financing, so if a good investment opportunity
arises, it is able to leverage its source of cheap debt and free cash flows to take advantage of such an
opportunity.
• Relative Weighting of Different Competitor-groups
• We weighted the 2010-2012E ratios for each of our competitor groups, and weighed each of those values by
20%, 40%, 40% because we believe that is the most comparable to Tesla in terms of market and industry
correlation.
• Computing Market Value Using Comparables
• We chose 2014 (the first “normal” year for Tesla) to compare, and discounted that value to the present day (May
2010).
• Discounting Starting Mid-Year
• Our DCF models assume a valuation mid-year (June) of 2010. Therefore, the discounting periods are half-year
shifted, and only half of the first year’s DCF value is incorporated into the DCF value.
Income Statement
Tesla’s Projected Income Statement
Statement of Cash Flow
Tesla’s Projected Statement of Cash Flow
Balance Sheet
Tesla’s Projected Balance Sheet
EV/EBITDA Multiples
Comparables
Prices, Production
Tesla’s Projected Units and ARPUs
Revenue Breakdown
Detailed View of Tesla’s Revenues