2010 Goldman Sachs Case Competition

Team 37 Presentation

Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu

Overview of Tesla

Tesla is a vertically-integrated new-technology automobile firm

Design

Engineering

Manufacturing

Distribution

Sales

Integrated
Automobile Firm

Core Competency

Sales and
Distribution

In-house processing
from start to finish

Powertrain
technology

Unlike its rivals, Tesla

owns its dealerships

Government Backstop
Government support is mutually-beneficial
Government

Political points

Goal: re-ignite, prop up automobile

industry
Cheap
loans are an indirect government
subsidy
Score political points via green tech and jobs
Political suicide to let Tesla fail and default
Loan guarantees incur zero upfront cost

Tesla

Auto industry

Green
Investments
Goal: to be green leader in auto industry
Expensive investments mitigated by cheap debt
Government support lends credibility to Tesla
Loan guarantees encourage bank lending

Governments interests are directly aligned with Teslas

Jobs

Assessment of Forecast
Is managements forecast realistic?

Units Sold (Model

S)

Revenue
(in millions)

$2,416
$2,010

30

(in thousands)

EBITDA Margins
22.9%

20

16.5%

Industry
Average
11.4%

15.3%
12.2%

5.8%

$142
2011E

10.1%

10

$782

0
2012E

2013E

2014E

2012E

2013E

2014E
Porsche Tesla

Weighted ARPU
$84,716 in 2013
$84,801 in 2014
Comparable to other
premium sedans

Model S Sales Projection

20,000 annual target
beginning 2013 plausible
<1% of global premium
sedan market
Mass production at
NUMMI

BYD

BMW Daimler SAIC

EBITDA Margins Optimistic

Management forecast puts
EBITDA margins at 16.5%
Median industry margins 11.4%
Full integration may facilitate
5% additional margin

pside and Downside Risks

Opportunities and risks associated with valuation and IPO

Opportunities
Superior Technology

Industry leader in EV powertrains, car batteries

Vehicle performance on par with Mercedes

Public Validation
Low-interest DOE loan provides financial health
In-line with green jobs agenda

Seasoned Management
Veteran executives with rich history of
innovation
Experienced in partnering with industry
leaders

Unrivaled Brand Recognition

Long waitlist for cars not available until 2012
Large down payments secure consumer loyalty

Risks
From Niche to Mass Production
The Model S is expected to be high-volume
Unrealistic production plan with current
facilities

Expansion Uncertainties
Uncertainty in 2012 debut of Model S
Design specs are still pending final review

Lack of Infrastructure
Lack of ubiquitous charging stations
inconvenient
Public policy unable to match Teslas
ambitions

Unclear Future Competitive Landscape

Established, well-funded rivals expected to enter
Disruptive technologies may alter landscape

Assessing IPO Need

An IPO is crucial to Teslas success

Why an IPO? Why now?

The IPO is necessary because even with DOEs generous loans, Tesla still
needs critical cushion and financing to successfully launch the Model S by 2012

In full compliance with DOE

terms and company needs
* Detailed projections included in appendix

IPO Timing

Recent IPOs have been grossly underpriced

Year-to-Date Monthly IPOs

European Debt Crisis Overblown

$2,573

(in millions)

Tesla is largely an American company

Tesla targets the affluent least affected
DOE loan unaffected by overseas crisis

$1,345

$1,218

$1,008

$861

Jittery Capital Markets

Jan

Feb

Mar

Apr

S&P 500 has fallen 10% since early April

May

IPO volume peaked in March; at year lows

Increases Teslas cost of equity

IPO Pricing Trends

100%
75%

But,

50%

Tremendous IPO Mis-Pricing

25%

>40% of IPOs are under-priced

0%
Jan

Below

Feb

Mar

In-Range

Apr

Above

May

IPO amounts should be significantly higher

Strong IPO possible despite economic
woes

trategic Capital Raising

Tesla should plan its capital raising strategically

Phase 1

Initial Public Offering

Amount: $175m
Jun-Aug, 2010

DOE Loan Draw

Phase 2

Secondary Offering
Amount: $85m
Jun-Aug, 2012

DOE Loan Draw

Phase 3

Secondary Offering
Amount: $50m
Jan-Mar, 2014

DOE Loan Pay-down

Amount: $165m

Amount: $225m, $75m

($36m), ($97m),

Jun, 2010

2011, early 2012

($121m)
Dec 2012, 2013, 2014

Debt Financing (20102012)

Secondary Offering
(2012)
Secondary Offering
(2014)

No additional debt beyond DOE loans due to low credit rating.

Pay down debt as FCF explodes to improve capital structure,
minimize idle cash
Extra financial cushion for the Model S debut in 2012. Imminent
Model S launch increases investor confidence and our valuation
To comply with DOE loan restrictions on
liabilities/shareholders equity ratio starting in 2014

Discounted Cash Flow

Computing the value using DCF
Revenue and CFO
3,000

(in millions)

Revenue

CFO

2,000
1,000
0
2009

2010

2011

2012

2013

2014

-1,000

DCF

We apply a dynamic Re as we believe earnings

normalization and large cash flows starting in
2013 will reduce risks to slightly above industry
averages
Growth
Terminal Growth Rate

400 (in millions)

200
0
-200
-400

2010

Key Assumption

2011

2012

2013

2014

5%

Multiples Analysis
Comparables analysis
EV/EBITDA Multiple

EV/Sales Multiple

* Weighted average of each company from 2010-2013

* Weighted average of each company from 2010-2013

Multiples Valuation

(in millions)

Summary

Tesla should proceed with an IPO

IPO Need

Tesla Deserves a Premium

Tesla needs time-sensitive capital

DOE loans, while hefty, are inadequate
Expansion scheduled for 2012

Strategic Capital Raising

Unrivaled technology and designs

Huge potentials with Powertrain
Second-to-none brand recognition

Potential Risks

Raise no more than required amount

Compliance with DOE terms necessary
Secondary offerings in 2012, 2014

Model S rollout is delayed

No experience with mass production
Margins fail to meet expectations
Sensitivity Analysis (DCF valuation in millions
$)
Terminal Growth

Cost of equity 2015+

15%

17.50%

20%

22.50%

4%

1251

996

823

710

5%

1509

1152

933

784

6%

1905

1368

1068

877

7%

2585

1684

1251

996

Appendix

Key Assumptions

Key assumptions and methodologies

Dynamic Equity Cost of Capital (Slide 9)
We believe that Teslas high cost of capital (25%) is only applicable until it begins
generating sustainable FCFs, starting in 2013. If Tesla reaches that point, its risks are
significantly reduced
Therefore, Teslas cost of capital should only be a little above industry averages as its risk
level is not necessarily higher, and it has a much more inexpensive source of debt
financing than its peers.

Lack of Additional Capex Investment Opportunities

Tesla will have large free cash flows starting 2013 and cheap debt financing, so if a good
investment opportunity arises, it is able to leverage its source of cheap debt and free cash
flows to take advantage of such an opportunity.

Relative Weighting of Different Competitor-groups

We weighted the 2010-2012E ratios for each of our competitor groups, and weighed each
of those values by 20%, 40%, 40% because we believe that is the most comparable to
Tesla in terms of market and industry correlation.

Computing Market Value Using Comparables

We chose 2014 (the first normal year for Tesla) to compare, and discounted that value to
the present day (May 2010).

Discounting Starting Mid-Year

Our DCF models assume a valuation mid-year (June) of 2010. Therefore, the discounting
periods are half-year shifted, and only half of the first years DCF value is incorporated into
the DCF value.

ncome Statement
Teslas Projected Income Statement

tatement of Cash Flow

Teslas Projected Statement of Cash Flow

Balance Sheet

Teslas Projected Balance Sheet

EV/EBITDA Multiples
Comparables

Prices, Production
Teslas Projected Units and ARPUs

Revenue Breakdown
Detailed View of Teslas Revenues