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Investment Overview for Tesla Motors (NASDAQ:TSLA)
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EV Market as a Percentage of the Total Passenger Car Market:
Our price estimate for Tesla Motors is highly sensitive to the growth of the EV market during the course of our forecast period. We have measured the size of the EV market as a percentage of the total passenger car market, which is expected to grow from the current level of around 64 million to almost 100 million by the end of our forecast period. We estimate the EV market (includes HEVs, PHEVs and BEVs) currently makes up around 2.0% of the total passenger car market, and expect it to reach 6% by the end of our forecast period, with a far higher adoption rate from 2020 onwards. If the rate of adoption of the vehicles is lower, with EVs making up just 5% of the total car market by the end of our forecast period, there would be a 20% downside to our price estimate. On the other hand, if circumstances favor a higher rate of adoption, of say almost 10% by the end of our forecast period, there would be a 50% upside to our price estimate.
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Gen III Market Share:
Tesla is expected to begin delivery of the Gen III to customers in 2016 or 2017. We believe that the company will sell around 10000-15000 units in 2016 and ramp up to 200,000 units by the end of our forecast period (2024). This equates to a market share (of the EV market) of around 0.5% in 2016 and 3.6% in 2019. We believe that market share will reach its peak of 4.3% in 2020, and gradually decrease to around 3% in 2024 as the market size of the EV market accelerates its growth rate around that time. If sales fall short of projected volumes (as experienced by both Nissan and GM), there could be a significant downside to the Trefis price estimate. Assuming the market size remains constant, if Gen III's market share manages to ramp up to only around 150,000 units by 2024 (a market share of 2.4%), there would be a downside of over 10% to our price estimate. Conversely, if the cars are well received in the market and Tesla ramps up production to 300,000 by the end of the forecast period (implying a market share of 3.75%), there could be an upside of over 10% to our price estimate. Tesla also faces significant execution risks (delay in launching the Model X). Many newly developed plug-in vehicles have experienced significant delays, including the Nissan Leaf, Chevy Volt, and Fisker Karma.
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Model X Gross Profit Margin :
Management is targeting a long-term gross margin of 25% on electric vehicles. Although we expect the bulk of Tesla's total car sales volumes to come from the Gen III, we believe that the Model X will generate larger cash flows due to higher margins. The Model X is expected to be priced between $70,000-80,000. We expect gross margins for the vehicle to be around 26%. If the company is able to achieve 4% higher gross margins for the vehicle, there could be a 10% upside to our price estimate. Conversely, if margins are lower by 3 points, there would be a 10% downside to our price estimate. The main factors impacting the gross margin include a) retail price of the Model X, b) materials and manufacturing costs, and c) economies of scale in production. Retail price depends on Tesla's ability to sell high margin options and accessories to customers as well as the percentage of international sales, which command higher retail prices. Material and manufacturing costs depend on commodity prices such as steel, aluminum, and battery pack costs (which are expected to reduce significantly over the coming years). Lastly, the economies of scale Tesla is able to achieve at its Fremont manufacturing plant is an important factor for gross margins. The company incurred higher than projected capital expenditures in 2010 and 2011 in order to increase automation and in-sourcing at its Fremont plant, which should aid margins.
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Tesla Motors is a Silicon Valley based automobile manufacturer focusing solely on the design, manufacture and sale of battery electric vehicles (BEVs) and related technologies. In 2008, the company launched its first model, an electric sports car called the Tesla Roadster, which at the time was the only highway capable electric car available in the U.S. Tesla has ambitious plans for the future, looking to shift from a niche producer of electric sports cars to an established volume automobile manufacturer. The company has achieved the first stage of this transformation with the launch of the Model S in June 2012. The Model S is an electric luxury sedan priced in the range of $50,000 to $100,000 after tax credits, competing with established luxury sedan manufacturers such as BMW, Audi and Mercedes Benz. Tesla will leverage the Model S platform to launch other vehicles beginning 2015, the first of which is a crossover vehicle, the Model X. In 2016, Tesla plans to introduce its third major vehicle, currently referred to as the Gen III. The vehicle will target the mass-market electric cars and would be priced at a base price of $30,000. Apart from manufacturing electric cars, Tesla is also a supplier of electric power train components (batteries, chargers, motors, power management systems) to other automobile manufacturers such as Toyota and Daimler. Toyota is a significant customer and strategic partner for Tesla, having invested $50 million in Tesla's IPO. Tesla could emerge as a significant supplier of power trains as most automobile manufacturers are looking to introduce their own electric cars.
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The majority of Tesla's value comes from the Model X and the Gen III, which will both be launched in the future (2015 and 2016 respectively).
Future model launches
Tesla Motors has recently launched the Model S, a battery electric luxury sedan, in June 2012. The Model S will be Tesla's first volume car, and its success is crucial for the company's ambitious plans of becoming America's fourth automaker. Tesla is targeting sales of 20,000 Model S sedans in 2013. The company's Fremont manufacturing facility will be equipped to produce 20,000 Model S sedans on a single shift, so production can be doubled by operating on two shifts should demand arise. Tesla has also revealed its third model, a crossover SUV called the Model X. The Model X will be based on the Model S platform and will begin deliveries in 2015. In 2016, the company plans to introduce the Gen-III, a mass-market electric car which is expected to have a base price of $30,000.
Total electric vehicle and plug-in hybrid market size
Tesla aims to become a mass producer of electric vehicles. In order to achieve that, there must be a large enough market. This is especially relevant for the Gen-III vehicle to be launched in 2016. As mentioned above, Tesla's value depends on its future electric vehicle sales, which in turn depends upon the potential size of the market. There are various factors that could affect the potential size of the market, such as the price of oil, fuel efficiency improvements in its internal combustion engine cars, the cost of batteries, recharging infrastructure, and government incentives. In China, the government is investing heavily in setting up a recharging infrastructure. China is already the world's largest automobile market, and it is growing at a much faster pace than the U.S. It is inevitable then that China will also be the largest market for plug-in vehicles. As Tesla expands internationally, China could be an important source of sales for Tesla, especially with the launch of the Gen-III later in the decade. Tesla has one showroom planned for China over the next couple of years.
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Falling battery costs to speed up adoption of electric cars
When the Tesla Roadster 1.0 was introduced in 2008, the battery cost was estimated at ~$36,000 for a 53kWh capacity, equivalent to $680 per kWh. This declined to ~$472 per kWh for the Roadster 2.5 introduced in 2010. Battery costs are expected to come down as technology improves and the manufacturing process achieves economies of scale. There are significant R&D expenses being poured into different battery technologies and it may be possible that an entirely new battery technology may be necessary for electric cars to become mainstream.
Tesla is employing a different form factor for its batteries compared to the rest of the automobile industry
Tesla has been using the cylindrical cell form factor, which is primarily used in consumer electronics (such as laptops), while the rest of the major auto manufacturers are using the prismatic (or flat) form factor. The rapid development in the consumer electronics industry over the past few years has helped reduce the per kWh cost for cylindrical form batteries, giving it a significant cost advantage. Tesla provides a number of battery pack options for the Model S, and offers far better range than competing electric vehicles. The company is a pioneer in adapting cylindrical form batteries for automotive use, as evidenced by the success of the Roadster since its launch in 2008. Furthermore, other automakers such as Daimler and Toyota have recognized Tesla's strength and are sourcing power train/battery components from Tesla. However, the prismatic form factor chosen by other automakers has its advantages. It is less complex (fewer cells per pack), and less susceptible to heating issues. Furthermore, the cost differential between the prismatic and cylindrical cell form will narrow over time. The evolution of battery technology and Tesla's ability to remain the leader will be a key trend to watch out for.
The electric car space is getting increasingly competitive with both established manufacturers and start-ups set to introduce new models
General Motors and Nissan introduced their mass-market electric vehicles in 2011 with the Chevy Volt and Nissan Leaf. The Volt is a plug-in hybrid (PHEV), providing a limited range on battery (~40 miles), after which a small internal combustion engine takes over. The Leaf on the other hand is a battery electric vehicle (BEV), with a range of ~100 miles. GM's approach allays 'range anxiety' in the consumer's mind, while Nissan's approach is less complex and possibly more cost effective. Toyota has introduced a plug-in Prius in 2012, and is developing an all-electric RAV4 mini SUV (in alliance with Tesla), while BMW plans to introduce its Megacity electric car in 2013. BYD, the Chinese manufacturer of plug-in hybrids, has ambitious plans for expansion in the US and Europe.
Government incentives for electric vehicle industry
In order to reduce dependence on oil, governments across the world are providing incentives to both consumers and manufacturers for the adoption of electric cars. In the US, for example, the federal government gives tax credits of upto $7,500 for the purchase of "advanced technology vehicles" (this includes EVs). This tax credit may be increased to $10,000. There are several other regulations, such as corporate average fuel economy (CAFE) regulations, the Zero Emission Vehicle program (ZEV), and subsidized loans for battery research and the manufacture of electric cars that can accelerate the pace of adoption. Government impetus in setting up infrastructure which will be crucial for the growth of the electric vehicle industry.
Changes in consumer behavior
Consumer behavior patterns are an important trend for electric car manufacturers. As oil prices rise and battery prices fall, it may become more attractive for consumers to purchase electric vehicles. Once there is a clear economic rationale to purchase electric vehicles, there could be a surge in demand. Other factors affecting consumer behavior will be the maintenance costs for electric cars vis-a-vis internal combustion engine cars, and the re-sale value of electric cars. Both of these factors are still unknown since mass market electric cars are only just being introduced.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF MethodologyView All Help Topics