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2010 Goldman Sachs Case CompetitionTeam 37 Presentation
Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu
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In-house processingfrom start to finish
Design Engineering Manufacturing Distribution Sales
Integrated Automobile Firm
Powertrain
technology
Core Competency
Unlike its rivals, Teslaowns its dealerships
Sales and Distribution
Overview of TeslaTesla is a vertically-integrated new-technology automobile firm
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Political points
Government BackstopGovernment support is mutually-beneficial
Goal: re-ignite, prop up automobile industry
Score political points via green tech and jobs
Cheap loans are an indirect government subsidy
Political suicide to let Tesla fail and default
Goal: to be green leader in auto industry
Government support lends credibility to Tesla
Expensive investments mitigated by cheap debt
Loan guarantees encourage bank lending
Loan guarantees incur zero upfront cost
Government
Tesla
Governments interests are directly aligned with Teslas
Auto industry
GreenInvestments
Jobs
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Assessment of ForecastIs managements forecast realistic?
Revenue Units Sold (Model S) EBITDA Margins
$142
$782
$2,010
$2,416
2011E 2012E 2013E 2014E
(in millions)
0
10
20
30
2012E 2013E 2014E
(in thousands)
Weighted ARPU Model S Sales Projection
20,000 annual target
beginning 2013 plausible $84,716 in 2013
$84,801 in 2014
Comparable to other
premium sedans
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Opportunities Risks
Superior Technology
Industry leader in EV powertrains, car batteries
Vehicle performance on par with Mercedes
Upside and Downside RisksOpportunities and risks associated with valuation and IPO
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
Expansion Uncertainties
Uncertainty in 2012 debut of Model S
Design specs are still pending final review
From Niche to Mass Production
The Model S is expected to be high-volume
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
Unrealistic production plan with current facilities
Disruptive technologies may alter landscape
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Assessing IPO NeedAn IPO is crucial to Teslas success
Why an IPO? Why now?
The IPO is necessary because even with DOEs generous loans, Tesla stillneeds critical cushion and financing to successfully launch the Model S by 2012
* Detailed projections included in appendix
In full compliance with DOEterms and company needs
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IPO TimingRecent IPOs have been grossly underpriced
$861
$1,218
$2,573
$1,345
$1,008
Jan Feb Mar Apr May
Year-to-Date Monthly IPOs(in millions)
IPO Pricing Trends
0%
25%
50%
75%
100%
Jan Feb Mar Apr May
Below In-Range Above
Tesla is largely an American company
Tesla targets the affluent least affected
DOE loan unaffected by overseas crisis
S&P 500 has fallen 10% since early April
IPO volume peaked in March; at year lows
Increases Teslas cost of equity
But,
>40% of IPOs are under-priced
IPO amounts should be significantly higher
Strong IPO possible despite economic woes
European Debt Crisis Overblown
Jittery Capital Markets
Tremendous IPO Mis-Pricing
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Strategic Capital RaisingTesla should plan its capital raising strategically
Phase 1 Phase 2 Phase 3
Initial Public Offering
Amount: $175m
DOE Loan Draw
Amount: $165m
Jun-Aug, 2010
Jun, 2010
Secondary Offering
Amount: $85m
DOE Loan Draw
Amount: $225m, $75m
Jun-Aug, 2012
2011, early 2012
Secondary Offering
Amount: $50m
DOE Loan Pay-down
($36m), ($97m), ($121m)
Jan-Mar, 2014
Dec 2012, 2013, 2014
To comply with DOE loan restrictions on
liabilities/shareholders equity ratio starting in 2014Secondary Offering (2014)
Extra financial cushion for the Model S debut in 2012. Imminent Model S
launch increases investor confidence and our valuationSecondary Offering (2012)
No additional debt beyond DOE loans due to low credit rating. Pay down debt
as FCF explodes to improve capital structure, minimize idle cashDebt Financing (2010-2012)
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Discounted Cash FlowComputing the value using DCF
-1,000
0
1,000
2,000
3,000
2009 2010 2011 2012 2013 2014
Revenue and CFO
Revenue CFO
DCF
We apply a dynamic Re as we believe earningsnormalization and large cash flows starting in 2013will reduce risks to slightly above industry averages
(in millions)
(in millions)
-400
-200
0
200
400
2010 2011 2012 2013 2014
Key Assumption
GrowthTerminal Growth Rate 5%
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Multiples AnalysisComparables analysis
EV/EBITDA Multiple
Multiples Valuation
* Weighted average of each company from 2010-2013
EV/Sales Multiple
* Weighted average of each company from 2010-2013
(in millions)
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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
SummaryTesla should proceed with an IPO
Tesla needs time-sensitive capital
Expansion scheduled for 2012
IPO Need
DOE loans, while hefty, are inadequate
TerminalGrowth
Cost of equity 2015+
Sensitivity Analysis (DCF valuation in millions $)
Unrivaled technology and designs
Second-to-none brand recognition
Tesla Deserves a Premium
Huge potentials with Powertrain
Raise no more than required amount
Secondary offerings in 2012, 2014
Compliance with DOE terms necessary
Strategic Capital Raising
Model S rollout is delayed
Margins fail to meet expectations
No experience with mass production
Potential Risks
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Appendix
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Key AssumptionsKey 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 (May2010).
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.
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Income StatementTeslas Projected Income Statement
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Statement of Cash FlowTeslas Projected Statement of Cash Flow
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Balance SheetTeslas Projected Balance Sheet
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EV/EBITDA MultiplesComparables
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Prices, ProductionTeslas Projected Units and ARPUs
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Revenue BreakdownDetailed View of Teslas Revenues