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Investment Overview for Tesla Motors (NASDAQ:TSLA)
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 vehicle market, which is expected to grow from the current level of around 88 million to almost 127 million by the end of our forecast period. We estimate the EV market (includes HEVs, PHEVs, and BEVs), which currently makes up close to 3.2% of the total passenger vehicle market, to account for 6.2% of the total passenger market by the end of our forecast period. 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 25% downside to our price estimate. On the other hand, if circumstances favor a higher rate of adoption, of say almost 8% by the end of our forecast period, there would be a 15% upside to our price estimate.
Gen III Market Share: Tesla is expected to begin delivery of the Gen III to customers in 2017. We believe that the company will sell around 50,000 units in 2017 and ramp up to more than 300,000 units by 2020. This equates to a market share (of the EV market) of around 0.4% in 2017 and 21.7% in 2024.
If sales fall short of projected volumes, 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 500,000 units by 2024 (a market share of 14%), there would be a downside of over 25% to our price estimate. Conversely, if the cars are well received in the market and Tesla ramps up production to 1,000,000 by the end of the forecast period (implying a market share of 28%), there could be an upside of more than 15% 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.
Model S and Model X Gross Profit Margins : The Tesla management is targeting a long-term gross margin of more than 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 S and Model X will generate larger cash flows due to higher margins. Both these premium vehicles are priced between $70,000-140,000. We expect that gross margins for the vehicles could be as high as 25% eventually. If the company is able to achieve 5% higher gross margins for them, there could be a more than 15% upside to our price estimate. Conversely, if margins are lower by 350 basis points, there would be a small downside to our price estimate. The main factors impacting the gross margin include a) retail price of the vehicles, 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 decrease 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.
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 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 upwards of $70,000 and competes with established luxury sedan manufacturers such as BMW, Audi, and Mercedes Benz. Tesla also leverages the Model S platform to launch other vehicles, the first of which is a crossover vehicle, the Model X. In 2017, 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 $35,000.
The majority of Tesla's value comes from the Model III, which is expected to be launched in 2017.
Future model launches
Tesla Motors launched the Model S, a battery electric luxury sedan, in June 2012. The Model S is Tesla's first volume car, and its success is crucial for the company's ambitious plans of becoming America's fourth automaker. After selling more than 22,000 units in 2013 and around 31,500 units in 2014 and over 50,000 units in 2015, the company is targeting sales of close to 90,000 units in 2019. The company's Fremont manufacturing facility will be equipped to produce 2,000 Model S sedans each week, a near fourfold increase in just over two years. Tesla has also launched to market its third model, a crossover SUV called the Model X. The Model X is be based on the Model S platform and began deliveries in late 2015. In 2017, the company plans to introduce the Gen-III, a mass-market electric car which is expected to have a base price of $35,000.
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 2017. 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.
Falling battery costs to speed up adoption of electric cars
According to a 2012 McKinsey study, the price of a lithium-ion battery pack could drop from $500-$600 per kiloWatt hour(kWh) to about $200 per kWh in 2020 and $160 by 2025.
According to General Motors, its lithium-ion battery pack cost had dropped to $145 per kWh by 2015 and is expected to drop further to $100 per kWh by 2020. However, unlike Tesla, GM does not manufacture batteries in-house.
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 introduced a plug-in Prius in 2012, and is developing an all-electric RAV4 mini SUV (in alliance with Tesla), while BMW also debuted the i3 in 2013. BYD, the Chinese manufacturer of plug-in hybrids, has ambitious plans for expansion in the US and Europe.
Government incentives for the 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 up to $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 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 Methodology
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