Tesla Motors Financial Analysis

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Updated: Jun 28, 2022
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Tesla is an automobile and energy company that was founded in 2003. Currently specializes in electric cars, energy storage and through their SolarCity subsidiary (acquired in 2016), residential solar panels. Tesla’s first vehicle was the Roadster (electric sports car), followed by the Model S (Luxury Sedan), and Model X (Luxury SUV) and late 2017 Model 3(low price, mass market vehicle). Tesla is the only vertically integrated energy company, offering end-to-end clean energy products, including generation (Solar panels), storage (Powerwall) and consumption. They have established a global network of vehicle stores, service centers and Supercharger stations to accelerate the widespread adoption of our products.

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The mass market low price Model 3 is crucial to Tesla overall vision, strategy, and survival (next 12 months will make or break Tesla). Tesla appears to be a promising company, but should investors invest in it or not?

Total revenue has increased each year from 2014-2017. The most significant of those increases was in the last two years where the percent increase from 2015 to 2016 was 73% and from 2016 to 2017 a 67%. Tesla revenue growth can be truly considered astounding. This increase in revenue of 73% in 2016 can be largely credited to a number of factors the Model 3. Both the initial and volume production took place in the second half of 2016. But both the Model S and X are also doing very well, that is their net order growth is strong.

According to Tesla 2016 Q4 report, they received 49% more net orders for the Model S and Xs. Awards such as the Golden Steering and being ranked as having the best owner satisfaction at 91% all contributed to the perception of Tesla vehicles and people’s decision to purchase them. Tesla is attempting to accelerate vehicle deliveries by expanding their retail, supercharger, service function areas. All of this contributed to the significant revenue jump of 2016.

We see the revenue increase, but the cost of revenue increased nearly the same proportion. For 2016, cost of revenue increased 73% as well, at $5.4 billion dollars. And the same can be said for the cost of revenue from 2016 to 2017 which was at 76% or $9.5 billion dollars. Tesla highest cost of revenue was automotive specifically at 4.2 billion or 77% of the total cost of revenue. The cost that falls under cost of automotive revenue includes direct parts, material and labor cost, manufacturing overhead, which includes depreciation costs etc. With the increase in more sales, and the increase in productive, naturally the cost of automotive revenue will go up as well.

For the 2017 year, cost of automotive revenue was $6.7 billion dollars. This is roughly 70% of the cost of revenue for that year. Again, this also included cost for direct parts, material and labor cost, manufacturing overhead etc. Other cost included in the cost of revenue are automotive leasing, services and other, and energy generation and storage segment.

The model 3 is paramount to Tesla’s overall success. According to their 2017 Annual Report, ”Our future growth and success is dependent upon consumers’ willingness to adopt electric vehicles and specifically our vehicles, especially in the mass market demographic which we are targeting with Model 3. Tesla is placing a large bet on their model 3. Tesla has sold 1,764 model 3 as of third quarter 2017. This would fall under automotive sales section of the income statement. The Model 3 competes with small to medium size luxury sedans. Tesla hopes to manufacture, market and sell the Model 3 in mass numbers, because it is their lowest price vehicle. They hope to sell large volumes and have a target of 5,000 Model 3 vehicles per week, by the summer 2018.

As of July 2018, Tesla was able to manufacture 5,000 model 3 cars in the last week of June. This is excellent news and fits well with Tesla’ short term and long term goals and strategy. Hopefully, with the adoption of the model 3, Tesla ability to manufacture 5000 per week, and people’s purchase, Tesla is on its way to making a profit specifically a net profit of $312 million. As of October 2018, Tesla did indeed turn a profit. This happened in the third quarter of 2018. It delivered 52,239 Model 3s. As for the Model S and X, they have more than 80,000 delivered.

It’s also important to look at Tesla Income statement from a vertical point of view. We also see Tesla’s gross profit increase over the last three years as well, increasing 4% from 2014 to 2015, 73% from 2015 to 2016 and 40% in 2016 to 2017. Their gross profit from the gross profit margin perspective don’t look as flattering though. The gross margins have been decreasing from 2014 to 2015, 28% to 23% and from 2016 to 2017, 23% to 19%. Gross profit margin is the difference between sales and the cost of goods sold divided by revenue. This is how much percent of reach dollar of the company’s revenue still available after the cost of good sold has been considered.

One reason for a possible decrease in gross margin is that cost is getting higher, while any cutting of cost can result in higher gross margins. For Tesla’s case, it does appear that their cost of revenue is increasing relative to their total revenue year by year. While Tesla’s revenue increased 68% from 2016 to 2017, its cost of revenue increased even more during that same period, from 76%. The year before, from 2015 and 2016 the total revenue and cost of revenue grew roughly the same amount at 73%. Tesla cost of revenue is going up and it’s worth looking into why this is came. A possible cause is that there is a higher supplier cost than the year before. Tesla supplier may be trying to in increase their own revenue.

It may also be worth looking at why revenue was lower from the 2016 to 2017 year. This could also cause the gross percent margin to go down. Both are areas worth looking into. Maybe the price of the Tesla vehicle were lowered to be more competitive. Maybe there were more discounts and promotions to increase more buyers. We know that Tesla’s competition is growing as many of Tesla’s competitors are trying to compete with Tesla. Some vehicle that compete with Tesla are the Nissan Leaf, Chevy Bolt, Mini E, and other electric or hybrid vehicle flooding the markets and giving consumers more choices. Their sales and success may be impacting Tesla’s gross profit margins.

How does Tesla (TSLA) gross profit margin compare with another company like Ford Motors(F). (Appendix 3) First, I think it’s worth noting that no other automobile company is just like Tesla. While Tesla built its business model from the ground up focusing mainly on electric vehicles, other companies have adopted electric, hybrid or other green powered vehicles and added green vehicle lineups to their preexisting vehicle lineups. Nonetheless, the Ford Motors gross margin from 2014 to 2017 were 8%, 12%, 11%, and 10%. For the same years, Tesla’s gross margin were 28%, 23%, 23% and 19%. If this is the case, than Tesla, despite is decrease in gross margin, is still well above one of its competitors and in a very comfortable zone.

Model 3: Our future business depends in large part on our ability to execute on our plans to manufacture, market and sell the Model 3 vehicle, which we are offering at a lower price point and which we intend to produce at significantly higher volumes than our present production capabilities for the Model S or Model X vehicles. We commenced production and initial customer deliveries of Model 3 in July 2017 and are targeting a forecasted production rate of 5,000 Model 3 vehicles per week by the end of the second quarter of 2018.

Tesla’s cash and cash equivalent standing has been on the headlines and for every good reasons: they have a cash flow problem. If a company runs out of cash, they won’t be able to meet their current liabilities. It may have more debt due in the next 12 months than it has liquid assets to cover. Tesla’s cash did see a drop from 2014 to 2015(-36%), but there was a increase from 2015 to 2016(186%). Unfortunately, they only had a insignificant cash increase from 2016 to 2017(.70%).

If we look at the Balance sheet from a vertical point of view, Tesla current assets have been very close to its current liabilities. While in 2014 and 2016, Tesla’s current asset was more than its current liabilities(but not by that much), in 2015 and 2017, its current liabilities was greater than its current assets. According to the current ratio was 1.51, .99, 1.07 and .86 for the 2014, 2015, 2016 and 2017 years. The quick ratio looks more gloomy though with its quick ratio of 1.06, .54, .72 and .56 for its 2014, 2015, 2016 and 2017 years.

While both ratios are liquidity ratios, current ratio measure a company’s ability to pay its short term liabilities with its short tier assets. On the other hand, quick ratio measures its ability to pay short term liabilities with the MOST liquid current asset, which can be converted into cash in 90 days or less. From the quick acid ratio perspective, Teslas does not look good.

What about their competitors? Ford’s current ratios were 6.58, 1.25, 1.2 and 1.23 for the 2014 to 2016 year and its quick ratio were 6.19, 1.14, 1.1, and 1.12 for the same period. There numbers indicate that whether you are looking at the most liquid assets or all current assets, Ford is able to pay their short term liabilities. They are in much better shape than Tesla.

According to Tesla’s 2017 annual report, their main source of cash are from the delivery of their vehicles, sales and installations of their energy storage products and solar energy system and proceeds from their debt facilities. This cash flows allows them to fund their operations, research and development as well as investments’

It’s also worth noting that we see a significant increase in total assets from 2015 to 2016, a whopping 180% increase. In the year 2016, Tesla acquired SolarCity for $2.8 billion dollars. They see SolarCity as part of their long term mission of accelerating the world’s transition to sustainable energy. What better way than to get into the the business of solar energy services. Solar city markets, manufactures and installs commercial and residential solar panels. As a result of acquisition of SolarCity, we see that Tesla’s total assets at $22.6 billion for 2016, up from their totals assets of $8 billion in 2015. According to Tesla 2016 Annual Report, they recognized a gain from the acquisition of SolarCity of $88.7 million and a loss on conversion of $7.2 million.

Tesla’s total liabilities also grew from 41% from 2014 to 2015, 150% from 2015 to 2016 and 36% from 2016. This is no usual for any company. Tesla’s growth in total assets, total liabilities and total equity is unlike anything other business have experienced during their growth. We are looking at an immense growth over a very short period of time for a company entering an industry and realm largely unknown and in its early years(electric vehicles).

When looking at Tesla’s Balance Sheet, it is also worth noting that their retained earnings has been running in the negative for the past 4 years, 2014 to 2017. This is a ”retained earning deficit,” or accumulated deficit. Tesla’s cumulative losses were greater than their cumulative profits resulting in a negative balance in their retained earnings.

But their growth has not been smooth as we saw from their cash standing and current and quick ratios. If we look at the debt to equity ratio, it is especially astounding and somber. Debt ratio measures the amount of debt a company takes to finance its operations versus its actual available capital. It’s the debt to equity ratio is high, we can assess that the company is using a significant amount of debt to fund its operations, debt that will sooner or later need to be paid off. Higher debt ratio and be interpreted as higher risk for investors.

Tesla’s debt to equity ratio was 5.3, 6.4, 3.7 and 5.7 for the 2014, 2015, 2016 and 2017 years. Tesla used mainly debt to fund its operations. From 2014, 2015, 2016, and 2017, Tesla used 84%, 86%, 79%, and 85% to fund its operations as oppose to equity which was 15%, 13%, 20% and 14% for the same years. Tesla uses mostly debt, a large amount of debt to finances it operations. This can cause alarm to some investors.

2017 presents significant challenges to Tesla’s business. They are rolling out their first mass produced car in the Model 3, which should enter the market sometime this summer. They are slated to invest over $2.0 billion in their Gigafactory 1 and they have approximately $1.0 billion in convertible bonds and other debt due by the end of the year. These three events will put significant pressure on their cash reserves and the company will need issue additional common stock and debt to keep operations working. If any one of these events should not go as planned Tesla will likely experience a serious degradation in their stock value. Tesla is a high risk, high reward investment, not for the faint-hearted.

Tesla needs to improve the number of vehicles they produce per month. Currently they are only making 5000/week. THis is a great improvement, and they’ve met their initial target, but more needs to be done in this area. Tesla is also competing with other companies in this segment. The longer Tesla takes to produce more Model 3s, the more their competitors will catch up and have a edge or steal more of their market. There is a demand for Model 3s right now and Tesla shit strike the iron while it is hot, taking advantage of the market demands. Tesla should also try to improve their cost of good sold so that they can earn more money per vehicle sold. They should also try to add more customization options for their Model 3, especially if their goal with their vehicle is be for the masses. I would also focus on improving Tesla gross profit margin.

This area is important because it is what Tesla’s company success is based on. Without Model 3 success, company will fail. Must look for ways to focus on this segment. The Model 3 is Tesla only “low” cost affordable vehicle, made and targeted specifically for the masses. While the other Models Tesla sells are excellent cars, they were never meant to appeal or for the mass market. The Tesla Model 3 was for the mass market. If they can tap into the potential sales of the Model 3 by making enough vehicle for demand, they can command a competitive edge over their competitors.

Tesla should try to increase their Tesla Model 3 production by 100%, from 5000/week to 10,000/week. Tesla should try to increase their revenue from automotive sales by to 20 percent. Tesla can take steps to increase its production of Model 3 by finding more suppliers for Model 3 parts and supplies and material and ordering larger quantities. Tesla can also increase its Model 3 production by building more factories for the Model 3 or expanding the floor place of the current Model 3 production plants. Tesla may want to consider using some of the manufacturing plants of the Model S and X for the production of Model 3’s instead.

Tesla can increase demand for the Model 3 by being more aggressive with their campaign and try to paint the Tesla Model 3 as a car for the masses by adding more customization, more colors, more styles. Currently there are only seven colors. If they want to appeal to the masses, they’ll need to increase the number of colors, rim styles, and customization options.

If tesla increase their Tesla model 3 by 100%, their revenue will go up along with their income. Tesla total revenue was $11.7 billion and current revenue for automotive sales were $8.5 billion in 2017 and gross profit at $2.2 billion. Tesla has sold 1,764 Model 3 as of the third quarter 2017. It is unclear how much the revenue and revenue from automotive sales would be. If the company followed my advice, both total revenue, revenue from automotive sales and gross profit would go up. This would naturally increase the gross profit margin.

The cost this would require would increase cost of good sold. Cost of revenue for automotive sales were $6.7 billion in 2017. This would go up. If we projected an increase of cost of revenue for automobile of 20%(+$1.34 billion), that would be a projected cost of revenue from sales of automobiles of $8.04 billion for the 2018 year.

If Tesla listened, they would have a projected increase of 20%(+$1.7 billion) revenue from sales of automotives. The current revenue for automotive sales were $8.5 billion in 2017. That would be a projected revenue from sales of automobiles of $10.2 billion for the 2018 year.

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Tesla Motors Financial Analysis. (2022, Jun 28). Retrieved from https://papersowl.com/examples/tesla-motors-financial-analysis/