Tesla- Intrinsic Value

        When someone says the word Tesla, what do you think of? Is it the sleek 288hp roadster, the semi with up to 500 miles of range, or more recently the unfortunate debacle with the Securities and Exchange Commissions probe into Tesla and Elon Musk's funding secured tweet? Tesla has caught the eye of many investors due to the immense upside and risk with 3.04 short ratio.Tesla's main business is the design, development, and manufacturing of fully electric vehicles, energy generation and storage, along with solar energy. Tesla currently has 3 vehicles; the first vehicle produced Model S, Model , a 7 passenger SUV, and the Model 3 which has been ramping up production. Tesla is working on producing the Roadster and Tesla Trailer, to expand its vehicle offering. Tesla is continuing to develop its self driving technology to improve vehicle safety. Tesla sells and services its vehicles through its own sales network. Tesla differentiates itself through its business model, owning its sales and service network, prestige, and acceleration to sustainable electric vehicles. Tesla controlling its sales network allows it to efficiently allocate capital and have better inventory control. Tesla in-house abilities to produce the drivetrain and other main devices such as interior and chassis allows for a competitive advantage once sustainable, an issue discussed later. Tesla boasts engineering expertise in lightweight materials used for electric cars such as aluminum.

Tesla has business prospects are encouraging. Electric vehicles look like they will be the main mode of transportation sooner rather than later. Tesla was one of the first to the market with a prestigious name to help support a higher price point, giving it a competitive advantage. Tesla has faced production problems in the past, but is on track to produce 70,000 vehicles this month, the most EV produced by one manufacturer in a single quarter. Tesla has set up a third production line under a tent in order to achieve production at this level, suggesting either its not sustainable or more resources will have to be acquired. There will be other options on the market for consumers going forward as Jaguar and Audi will both have EV available in the next few months that will have better range, and faster acceleration. Traditional car makers will compete with Tesla to with lower price points and lack the production problems. Shareholders have voiced concerns that although Musk is a great visionary, Tesla needs someone in charge that can execute production.Tesla has another hurdle it will have to overcome in addition to competition and production issues, tax credit phaseouts. In the United States, EV purchasers receive a $7500 tax credit on electric vehicles purchased from manufactures with less than 200,000 such models sold. Tesla has reached that milestone and phaseout will start to occur with the tax credit completely phased out by the end of 2019. On a vehicle that costs $49,000 that is a lot of extra money to spend or for Tesla to reduce the price when they already have a negative operating margin.


When determining the value for Tesla I used a weighted average cost of capital of 9% which leads to a estimated share price of $456 signaling a buy at the current price. Assumptions are made that Tesla's capital structure is 80% debt financing and 20% equity will remain the same. Another assumption is there won't be changes in risk in the business or market, which is hard to determine and seems unlikely based on new competitors, production issues, and the tax credit phaseout.

With rising interest rates due to the expansion of the economy Tesla has been operating under a beneficial interest environment. The Fed has signaled rising rates, since almost 70% of the value of the stock is calculated off of Tesla's terminal value shifts in interest can significantly lower the price. Lets say rates do rise and the cost of debt increases to 12%. Due to higher interest rates the market risk premium shrinks to 10% instead of 14% due to the high yield of bonds. Tesla's terminal value now accounts for almost 90% of the value and a target price of $397. With Tesla's current price of $300 a share I would not recommend buying Tesla due to the terminal value accounting for most of its value and the risk doesn't outweigh the reward.