Expert answer:Forecasting Revenues TESLA case

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Forecasting Revenues for Tesla Motors, Inc.
Tesla Motors, Inc. (hereafter, “Tesla”) is a Silicon Valley-based company that
designs, manufactures and sells electric cars and electric vehicle power train
components. At the time of this case, the company was at a critical turning
point, having completed a planned crossover of its product lines, wrapping up
its production of its Roadster models and beginning production of its new
Model S sedan (with the Model S platform expected to be used as a common
platform to launch new electric vehicle models in the future). Because of these
unusual circumstances, forecasting for Tesla presents some definite challenges.
Read the attached case “Forecasting Revenues for Tesla Motors (Part A)” to answer the following
questions. Submit brief written responses and supporting computations at the start of class on
October 30.
For purposes of this analysis exercise, assume that it is near the end of 2012, and do not use
outside resources.
1. For Tesla’s primary source of future revenue, is it reasonable to rely on trends in the
historical sales in order to forecast future levels of sales? Why or why not?
2. Based on the information presented in the case, what is your best estimate of Tesla’s total
revenues for the fiscal years 2013 and 2014? Show any supporting computations and briefly
explain your estimates.
3. Apply your judgment to develop two additional revenue forecasts for each of 2013 and 2014:
(i) a “best case” scenario and (ii) a “worst case scenario”. Show any supporting
computations and briefly explain your estimates.
4. Based on the above analysis, compare your forecasted revenues to the analyst consensus
(mean) estimates presented in the case materials. What does this suggest to you about the
estimates of the analysts following this firm?
FORECASTING REVENUES FOR TESLA MOTORS (PART A) *
TESLA MOTORS was founded in 2003 by a
group of intrepid Silicon Valley engineers
who set out to prove that electric vehicles
could be awesome.
Quoted from http://www.teslamotors.com/about (10/10/2012)
In June 2010, Tesla Motors, Inc. (hereafter, “Tesla”) filed a prospectus for its initial public offering of
13.3 million shares at $17 per share on the NASDAQ (ticker symbol: TSLA). The basis of offering
included the initial production of its first electric vehicle, the Tesla Roadster (in 2008) and its planned
introduction of its next vehicle innovation, the Tesla Model S (first revealed in March 2009). A year after
the drivable early prototype of the Model S was revealed, Tesla had received over 2,000 customer
reservations with a minimum refundable payment of $5,000, despite production only being planned to
begin in 2012. 1 At the end of September 2012, Tesla filed for a secondary public offering of just over 6.9
million shares. The last reported sale price of their stock had been $28.49 per share. 2
Tesla was co-founded by Elon Musk (who had previously founded SpaceX and co-founded PayPal), who
continues to oversee the company’s product strategy as Chairman, Product Architect, and CEO. Intent on
becoming a leading global manufacturer and direct seller of electric vehicles as well as electric vehicle
technologies, Tesla’s strategy necessarily includes obtaining new funding, continuing technological
advancements, and developing operational efficiencies. 3
•
The need for funding remains substantial. Although Tesla had generated $147.5 million in revenue
from its inception in 2003 through March 2010 (the quarter ended immediately prior to its initial
public offering), it also had accumulated a retained deficit of $290.2 million.4 In January 2010, Tesla
entered into a loan agreement with the United States Federal Financing Bank and the Department of
Energy (DOE), pursuant to the Advanced Technology Vehicles Manufacturing Incentive Program, for
two multi-draw term loan facilities in an aggregate principal amount of up to $465.0 million. By the
time of their newly announced secondary offering, Tesla reported these funds had been fully drawn. 5
•
On-going research and development is significant. For example, the cumulative capital expenditures
and research and development costs for the Tesla Roadster from its inception in 2003 to the date
Tesla delivered the first Tesla Roadster equaled approximately $125 million. 6 In 2011 alone, Tesla
incurred additional research and development expenses of $209 million, with an additional $143
million incurred during the first six months of 2012. 7
*
1
2
3
4
5
6
7
Professor Susan Krische prepared this case as the basis for class discussion with preliminary research assistance provided by Ali Hayat and
Raunak Butani, and thanks Doug Ilg for useful comments on the initial development and updates of this case. For full disclosure, the author
became a reservation holder in June 2010, and retired her then-11-year-old compact car when she received her Tesla Model S in February
2013. However, the case is not intended to serve an endorsement, a source of primary data, or an illustration of effective or ineffective
management. Please do not distribute this case outside of class without prior permission from the author. For ease of exposition, sources of
information are referenced in the footnotes to the case, with page references included for materials that are paraphrased and a separate
indication provided if materials are directly quoted. Full citations are provided in the reference list at the end of the case.
Tesla Motors, Inc. Form 424B4, as filed 06/29/10 (pp. 1-2).
Tesla Motors, Inc. Form 424B5, as filed 09/28/12 (p. 1).
Tesla Motors, Inc. Form 424B4, as filed 06/29/10 (p. 7).
Tesla Motors, Inc. Form 424B4, as filed 06/29/10 (p. 3).
Tesla Motors, Inc. Form 424B5, as filed 09/28/12 (p. S-4).
Tesla Motors, Inc. Form 424B4, as filed 06/29/10 (p. 7).
Tesla Motors, Inc. Form 424B5, as filed 09/28/12 (p. S-8).
Forecasting Revenues for Tesla Motors
•
Page 2 of 19
Tesla began manufacturing its Model S in June 2012, with the Model S platform expected to be used
as the common platform to launch new electric vehicle models, such as the Model X (an SUVminivan crossover with deliveries expected to begin in 2014). Tesla had been producing its Roadsters
using Lotus facilities, and in a planned crossover of product lines, completed that production series in
2012 (although a limited inventory of Roadsters remains available for sale in Europe and Asia,
primarily during 2012). 8 The next series of Tesla cars will be completed at the Tesla Factory, an
integrated electric vehicle manufacturing facility in Fremont, California and more familiar to some as
the former GM-Toyota NUMMI joint venture.
,
Tesla Factory, Model S Ride Event ©2011
•
As of September 23, 2012, Tesla had produced 255 production Model S vehicles, including 77
vehicles during the week ended September 23, 2012, and had delivered 132 production Model S
vehicles. It currently expects to deliver between 200 and 225 vehicles in the third quarter and between
2,500 and 3,000 vehicles in the fourth quarter of 2012. 9 Tesla has also announced its intention to
develop a third-generation electric vehicle to follow after the Model S and Model X, but at a lower
price point to generate higher volumes of production. However, Tesla has not yet finalized the design,
engineering or component sourcing plans for these next-gen vehicles.10
Tesla Model S
http://www.teslamotors.com/models/gallery#10 (10/10/2012)
•
8
9
10
11
Tesla Factory, Model S Ride Event ©2011
Tesla Model X
http://www.teslamotors.com/modelx (10/10/2012)
Tesla plans to sell its electric vehicles in company-owned Tesla stores and over the internet. The
Tesla website indicates that there are currently 31 store and service locations worldwide, often in high
profile retail centers, with more being planned. 11 Any Model S sales to date have been made to prior
reservation holders. As of September 23, 2012, there were approximately 13,000 reservation holders,
Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (p. 15).
Quoted from: Tesla Motors, Inc. Form 424B5, as filed 09/28/12 (p. S-10).
Tesla Motors, Inc. Form 424B4, as filed 06/29/10 (p. 2), and Form 424B5, as filed 09/28/12 (p. S-24).
Tesla Motors, Inc. http://www.teslamotors.com/about (10/10/12); Tesla Motors, Inc. http://www.teslamotors.com/locations (10/10/12).
Forecasting Revenues for Tesla Motors
Page 3 of 19
and Tesla does not expect to regularly carry inventory at its stores. Thus, even after it works through
the current reservations list, Tesla expects that customers will usually need to wait a few months from
the time they place an order until the time they receive their vehicle. This distribution model is not
common in the automobile industry today, and this type of custom manufacturing is unusual in the
premium sedan market in the United States. 12
IT’S MORE THAN ELECTRIC, IT’S TESLA. 13
Within the electric-based vehicle segment, there are three primary means of “powertrain electrification”
that helps to differentiate competitors: 14
•
Electric Vehicles are vehicles powered completely by a single on-board energy storage system
(battery pack or fuel cell) which is refueled directly from an electricity source. Both the Tesla
Roadster and Model S are examples of electric vehicles.
•
Plug-in Hybrid Vehicles are vehicles powered by both a battery pack with an electric motor and an
internal combustion engine, which can be refueled both with traditional petroleum fuels for the engine
and electricity for the battery pack. The internal combustion engine can either work in parallel with
the electric motor to power the wheels, such as in a parallel plug-in hybrid vehicle, or be used only to
recharge the battery, such as in a series plug-in hybrid vehicle like the Chevrolet Volt.
•
Hybrid Electric Vehicles are vehicles powered by both a battery pack with an electric motor and an
internal combustion engine, but which can only be refueled with traditional petroleum fuels as the
battery pack is charged via regenerative braking [as well as by direct generation], such as used in a
hybrid electric vehicle like the Toyota Prius.
According to Frost & Sullivan, a business research and consulting firm, the market for electric-based
vehicles, which includes electric vehicles, hybrid electric vehicles and plug-in hybrid electric vehicles, is
expected to grow to approximately 10.6 million units worldwide, or approximately 14% of new vehicles
sold by 2015, an increase from approximately 1.75 million units or 3% of new vehicles sold in 2008. 15
However, the worldwide automotive market, particularly for these alternative fuel vehicles, is highly
competitive and many, including Tesla, expect it will become more so in the future. In Japan, Mitsubishi
has been selling its electric iMiEV since April 2010. In December 2010, Nissan introduced the Nissan
Leaf, a fully electric vehicle, in the United States, and Ford introduced the pure electric Ford Focus in
2012 with plans to introduce a plug-in hybrid Ford CMax in 2012. In addition, several manufacturers,
including General Motors, Toyota, Ford, and Honda, are selling hybrid vehicles, and certain of these
manufacturers have announced plug-in versions of their hybrid vehicles. For example, in December 2010,
General Motors introduced the Chevrolet Volt, which is a plug-in hybrid vehicle that operates purely on
electric power for a limited number of miles, at which time an internal combustion engine engages to
recharge the battery pack. Moreover, it has been reported that many of the other large automobile
manufacturers, such as BMW, Daimler, Lexus, Audi, Renault and Volkswagen, are developing electric
vehicles. Several new start-ups have also entered or announced plans to enter the market for performance
electric vehicles. Finally, electric vehicles have already been brought to market in China and other foreign
countries, and Tesla expects a number of those manufacturers to enter the United States market as well. 16
In addition to alternative fuel vehicles, Tesla also faces competition for the Model S from other
(combustion-powered) automobile manufacturers in the premium sedan market, including Audi, BMW,
Lexus and Mercedes.
12
13
14
15
16
Tesla Motors, Inc. Form 424B5, as filed 09/28/12 (p. S-22).
Quoted from: Tesla Motors, Inc. http://www.teslamotors.com/about (10/10/2012).
Quoted from: Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (pp. 24-25).
Tesla Motors, Inc. Form 424B4, as filed 06/29/10 (p. 4).
Quoted from: Tesla Motors, Inc. Form 424B5, as filed 09/28/12 (p. S-26).
Forecasting Revenues for Tesla Motors
Page 4 of 19
Nevertheless, this is not the first hey-day of the electric vehicle. That was over 100 years ago. The first
electric car in the U.S. was reportedly built by William Morrison of Des Moines, Iowa in 1891. In 1900,
of the approximately four thousand cars produced in the United States, 28 percent were powered by
electricity, and electric cars represented about one-third of all cars found on the roads of New York City,
Boston, and Chicago. With the introduction of Henry Ford’s Model T (the first mass-produced and gaspowered car) in 1908 and Charles Kettering’s invention of the electric automobile starter in 1912, the
electric car ceased being a viable commercial product by the 1920s. 17
With increasing concerns developing about
pollution and the cost of oil, there were several
later attempts at reintroducing electric vehicles.
For example, in 1974, Vanguard-Sebring’s
“CitiCar” made its debut at the Electric Vehicle
Symposium in Washington, D.C. The CitiCar had a
top speed of over 30 mph and a reliable warmweather range of 40 miles. By 1975, the company
was the sixth largest automaker in the U.S. but was
dissolved only a few years later. 18 Perhaps more
widely recognized would be General Motors’ (GM)
“EV1,” which was introduced as a concept car at
the 1990 Los Angeles Auto Show (then called the
“Impact”) and became commercially available for
consumer leasing in 1996. 19 In 2003, though, GM
announced that it would not renew leases on its
EV1 cars, and indicated that it would no longer
supply parts to repair the vehicles, with plans to
reclaim the cars by the end of 2004. Of course, in
2006, Tesla publicly unveiled its Tesla Roadster,
with the first Roadsters sold in 2008.
Sebring-Vanguard CitiCar
http://en.wikipedia.org/wiki/File:Citicar.jpg (10/11/2012)
General Motors EV1
http://www.sonyclassics.com/whokilledtheelectriccar/electric.html
(10/10/2012)
THE BEGINNING OF A REVOLUTION? 20
Tesla describes its business as the design, development, manufacturing and selling of high-performance
fully electric vehicles and advanced electric vehicle powertrain components. 21
Tesla’s current focus is on its Model S, a four-door, five-passenger premium sedan with an acceleration
from zero to 60 miles per hour in a targeted time as low as 4.4 seconds in its performance version. The
Model S is offered with a variety of battery pack options—40 kWh, 60 kWh and 85 kWh—which are
estimated to offer a range on a single charge of 160 miles, 230 miles, and 300 miles, respectively, while
traveling at a steady speed of 55 miles per hour. 22 The base Model S has an effective base price of
$49,900 in the United States with the 40 kilowatt-hour (kWh) battery pack option, assuming and after
giving effect to the continuation of a United States federal tax credit of $7,500 for the purchase of
alternative fuel vehicles. Cars equipped with either the 60 kWh or 85 kWh battery packs will have the
17
18
19
20
21
22
PBS NOW. Who Killed the Electric Car? Broadcast Week of 06/09/2006. Timeline: History of the Electric Car.
http://www.pbs.org/now/shows/223/electric-car-timeline.html (10/10/12).
PBS NOW. Who Killed the Electric Car? Broadcast Week of 06/09/2006. Timeline: History of the Electric Car.
http://www.pbs.org/now/shows/223/electric-car-timeline.html (10/10/12).
http://www.sonyclassics.com/whokilledtheelectriccar/electric.html (10/10/12).
Partial title of magazine article: Goldman, J. (April 2012) The Car of the FutureThe Tesla Motor Company is building electric cars in
Fremont. Is this the beginning of a revolution? Diablo: The Magazine of the San Francisco East Bay.
http://www.diablomag.com/Diablo-Magazine/April-2012/The-Car-of-the-Future/ (10/10/2012).
Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (p. 4).
Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (p. 5).
Forecasting Revenues for Tesla Motors
Page 5 of 19
capability to “fast charge” at one of Tesla’s SuperCharger facilities, which it began installing in 2012 (in
California to date, but with plans to expand to selected locations throughout the United States). 23
Appendix 1 provides a description of the battery and performance options currently available on the
Model S, along with expected pricing levels.
In February 2012, Tesla revealed an early prototype of the Model X crossover as the first vehicle it intends
to develop by leveraging the Model S platform. This vehicle has been designed to fill a product niche with
the space of a minivan and the style of an SUV, while having high performance features such as a dual
motor all-wheel drive system. Tesla plans to start production of the Model X in the fourth quarter of 2013
and to ramp up to significant customer deliveries in early 2014. It anticipates that it will make the Model X
available with 60kWh and 85 kWh battery pack options, with pricing of each version similar to a
comparably equipped Model S. It intends to target an annual production rate of approximately 10,000 to
15,000 Model X cars per year from further expansions in the capacity of the Tesla Factory. 24
Although the company intends to develop a third-generation electric vehicle to be produced at the Tesla
Factory, that vehicle would likely be produced a few years after the introduction of the Model X
crossover. 25
Although Tesla currently sells its cars primarily to individual customers, it has also developed several
strategic or commercial relationships with Daimler, Toyota, and Panasonic. Tesla intends to expand its
business by developing and selling additional powertrain components and systems to Daimler, Toyota
and other third party automobile manufacturers, and has secured a $101.2 million loan under its DOE
Loan Facility to fund the infrastructure for these activities. 26 Appendix 2 replicates Tesla’s “Note to
Consolidated Financial Statements” on Development Services.
To provide more information on Tesla’s sales history, Appendices 3 and 4 replicate Tesla’s “Note to
Consolidated Financial Statements” on Revenue Recognition and on Segment Information, respectively.
RECENT DEVELOPMENTS
At the end of September 2012, Tesla filed for a secondary public offering of just over 6.9 million shares.
The prospectus provided a discussion of recent developments for Tesla, including (among other items) its
expectations for vehicle production in 2013 and beyond (see Appendix 5). The “Summary Condensed
Financial Statements” included in the prospectus are also reproduced in Appendix 6.
As at October 10, 2012, Thompson One Analytics 27 reported the last closing price for Tesla as $28.37 per
share with a 12-month price target of $36.00 per share. Appendix 7 provides a summary table of the
available analysts’ revenue forecasts for Tesla’s next several fiscal years.
23
24
25
26
27
Tesla Motors, Inc. http://www.teslamotors.com/supercharger (10/11/12).
Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (p. 9).
Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (p. 9).
Tesla Motors, Inc. Form 10-K, as filed 02/27/12 for the period ending 12/31/11 (p. 16).
Thomson Reuters. Thompson One Analytics database: Security > Overview > Snapshot. h …
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