Tesla Motors, Inc.
Tesla’s stock has been experiencing significant pressure in the past weeks. Prior to Tesla’s 4Q15 earnings call on February 10, 2016, the stock was down about 38% year-to-date. In the wake of the earnings call, which investors appeared to view positively, the stock recaptured some ground.
We believe the recent decline in Tesla’s stock price prior to the earnings call was driven by investor concerns around six main factors:
• Risk off behavior
• Low oil prices
• Threats of a recession
• Delivery numbers/problems with Model X
• Cash needs and sources and free cash flow concerns
• Competitive threats
We do not believe any of these concerns present issues with regard to Tesla’s long-term growth prospects at this time. We detail our thoughts below.
How does risk off investor behavior impact Tesla and/or its stock price? The recent decline in Tesla’s share price is consistent with price declines of other high-growth, high-valuation stocks, as investor exited these types of stocks in a flight to safety typical of a volatile market. As long-term investors, we try not to react to short-term market behavior, but strive to keep our focus on the fundamentals of the investment opportunity which, in Tesla’s case, we believe remain strong.
Will low oil prices depress Tesla’s sales? Some believe that continued low prices will convince consumers to opt for gasoline powered vehicles over an electric vehicle (EV) such as the Tesla. This has not proven to be the case to date. According to Tesla’s fourth quarter earnings report, in 2015, during a time of historically low oil prices, Model S was the only vehicle in its class with growing sales. Tesla also reported a major backlog of orders for Tesla’s new SUV, Model X.
Could a recession hurt Tesla’s sales? Some observers believe a recessionary economy could create headwinds for sales of luxury automobiles such as the Tesla. However, a recession may or may not impact sales of luxury automobiles. It depends on which consumer segments are most affected. We also believe the industrial slowdown we are experiencing as a result of persistent low oil prices will be short-lived. We think the low cost of energy will eventually result in faster growth in the rest of the economy, as assets previously allocated to energy costs are redeployed. We think this could happen sooner rather than later.
Does the slow ramp of the Model X mean Tesla is facing operational issues? The slow ramp of, and production-related issues with, Model X, raised the specter of possible operational problems. On the
February 10 earnings call, Tesla alleviated those concerns by providing delivery guidance that beat Street

expectations. Tesla said it plans to deliver at least 80,000 vehicles in 2016, with a high end of 90,000. The forecast represents a 60 to 80% increase in sales. Musk also said that the issues with the Model X had been resolved and he did not anticipate further issues.
Will Tesla have enough free cash flow? Some investors are focused on whether Tesla will have adequate free cash flow to finance its ambitious growth plan. On the 4Q15 earnings call, Tesla addressed these questions, saying it expects to exit 2016 with a higher cash balance than in 2015 as it will use an assetbacked lending facility to close any needed financing gap for the year.
Will competitive threats cut into Tesla’s sales? Other car manufacturers are starting to produce EVs, and companies such as Alphabet (formerly Google) and Apple have signaled interest in the EV and autonomous driving markets. We believe Tesla will maintain its market leading position. We think Tesla has first mover advantage, the best talent pool in the industry, scale and brand. The Tesla is truly revolutionary as it is the first all-electric, semi-autonomous, networked car. Traditional car manufacturers have historically been heavily invested in creating internal combustion engine vehicles, and they would have to transform every part of their business to create the equivalent of a Tesla.
We retain conviction in Tesla. While paving the way for transformation of the automotive industry in areas like electrification, safety, self-driving, connectivity and more, Tesla has built an impressive brand awareness that will serve it for years to come. We believe that over the next decade, electric vehicles will be cheaper, better and safer. Tesla is enabling the ride to this future and with its first mover advantage, human capital and a visionary leader, and we believe it will take a significant share of this trillion dollar industry sea change.
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The discussion of market trends and companies throughout this report are not intended as advice to any person regarding the advisability of investing in any particular security. Some of our comments are based on current management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time of the publication of this report and are subject to change any time based on market and other conditions, and we have no obligation to update them.