TSLA : Tesla Motors Stock Research Report

2017-10-09 - by Asif, Contributing Analyst

Tesla Motors's mission is to accelerate the world’s transition to sustainable energy. The company design, develop, manufacture, lease and sell high-performance fully electric vehicles, solar energy generation systems and energy storage products. The company also offer maintenance, installation, operation and other services related to its products.

Automotive

Tesla Motors production vehicle fleet includes Model S premium sedan and Model X sport utility vehicle, which are its highest-performance and most capable vehicles, and beginning in July 2017, its Model 3, a lower priced sedan designed for the mass market. The company continue to enhance its vehicle offerings with enhanced Autopilot options, Internet connectivity and free over-the-air software updates. The company continually deploy its internally developed software into the vehicle fleet, depending on the hardware of the vehicle, to provide additional safety and convenience features. The company are also actively working on future vehicles, such as a 100%-electric semi-truck.

In July 2017, The company completed its engineering, manufacturing and supply chain efforts on Model 3 product development, and commenced production of Model 3 on schedule. The company are continuing preparations at tis production facilities and continue to work closely with all Model 3 suppliers as The company ramp to volume production.

Energy Generation and Storage

The company's energy storage products, which The company manufacture at Gigafactory 1, consist of Powerwall for residential applications and Powerpack for commercial, industrial and utility-scale applications. The company also plan to manufacture its Solar Roof as well as solar panels at its Gigafactory 2 in Buffalo, New York. In May 2017, The company began accepting reservations for Solar Roof. The company started pilot manufacturing Solar Roof tiles in the second quarter of 2017 in Fremont, and plan to transition to production before the end of the year to Gigafactory 2. Its partner, Panasonic, will provide capital and operational support to manufacture photovoltaic (“PV”) cells, thus enabling high volume integrated tile and PV cell production at a single facility.

Management Opportunities, Challenges and Risks

Automotive Demand, Production and Deliveries

The company improve its production vehicles by introducing new over-the-air software updates continually, and new model variants from time to time, that improve range, performance, safety and value, and it expect to continue to do so. For example, The company has recently expanded offerings of its battery size for Model S and Model X to cater to a wider range of consumers. Likewise, while early Model 3 vehicles will have a limited number of permutations, which significantly reduces manufacturing complexity and streamline the purchasing process for its customers, The company will gradually introduce additional options, such as Dual Motor All Wheel Drive, as the company ramp production. The company also expect that the demand for its vehicles will continue to increase as The company improve its vehicles, expand its retail, service and charging infrastructure, and as The company develop and introduce new vehicle variants and models. In addition, the introduction of the more affordable Model 3 will continue to generate incremental demand for its vehicles by making its vehicles accessible to a larger market.

The company is making progress in increasing vehicle production. For the three months ended June 30, 2017, The company produced 25,708 vehicles, a new quarterly record, despite a production shortfall of 100 kWh battery packs for Model S and Model X through early June 2017 and disruptions from extensive installation of Model 3 manufacturing equipment. For Model 3, as is inherent in the production ramp of each all-new product, The company expect production to begin slowly, grow exponentially, and then tail off at full production. Accordingly, The company expect to achieve a rate of 5,000 Model 3 vehicles per week by the end of 2017. The company expect to further ramp to a rate of 10,000 Model 3 vehicles per week, and an annual Tesla vehicle production rate in excess of 500,000, at some point in 2018. The company has designed Model 3 to facilitate a ramp to volume production, including through production facilities that are highly dense and automated, resulting in costs of materials and labor for Model 3 that are expected to be significantly lower than those of Model S and Model X. The company also expect to make additional investments and preparations as The company make milestone-based payments for Model 3 equipment and continue with Gigafactory 1 construction, in addition to expanding its Supercharger, store, delivery hub and service networks.

In addition to expanding its vehicle production and deliveries, The company expect to continue to lower the cost of manufacturing its vehicles over the next several quarters due to economies of scale, material cost reductions and more efficient manufacturing. The company have achieved cost improvements through material cost reductions from both engineering and commercial actions and increased manufacturing efficiencies including lower labor and overhead and better inventory control. This is also evident through increased product reliability including vehicle, battery and drive units that resulted in reductions of its warranty expense.

In order to accommodate a much larger fleet of customer vehicles as The company increase deliveries and to provide timely customer service, The company continue to place emphasis on growing is sales, service and charging infrastructure worldwide. In particular, The company continue to open new Tesla retail, locations, service centers and delivery hubs around the world, The company continue to expand its mobile repair services, and The company plan to significantly increase the number of Superchargers and Destination Charging connectors globally. The company expect vehicle sales outside of North America to grow significantly in the long-term.

Energy Generation and Storage Demand

The company believe that demand for its energy products will continue to increase with new product offerings and product integration. The company plan to reduce customer acquisition costs of its energy generation products, including by cutting advertising spend and increasingly selling these products in Tesla stores. In the second quarter of 2017, The company stopped door-to-door sales of solar products, and rolled out solar and storage product sales in over 50 Tesla stores, where The company saw improved performance in key performance indicators relative to the best non-Tesla retail locations. Based on these results, The company is continuing to roll out energy generation and storage products to its stores with dedicated energy product sales personnel.

Trends in Cash Flow, Capital Expenditures and Operating Expenses

The company plan to continue to invest heavily in capital expenditures to increase vehicle production in its Fremont Facility, including for Model 3 production lines, facilities and manufacturing equipment at Gigafactory 1 as well as new retail locations, service centers and Supercharger locations. The company expect to invest approximately $2.0 billion in capital expenditures during the second half of 2017. As of June 30, 2017 and December 31, 2016, the net book value of its Supercharger network was $236.3 million and $207.2 million, respectively, and as of June 30, 2017, its Supercharger network included 884 locations globally. The company plan to continue investing in its worldwide Supercharger network for the foreseeable future and expect such spending to continue to be a minimal portion of total capital spending. The company allocate Supercharger-related operating expenses to cost of total automotive revenues and selling, general and administrative expenses, which were immaterial for all periods presented.

The company expect operating expenses to grow in 2017 as compared to 2016, driven by engineering, design, testing and production expenses related to Model 3, supplier contracts and higher sales and service costs associated with expanding its worldwide geographic presence. In addition, The company expect operating expenses to increase as a result of the increased selling, general and administrative expenses incurred by its energy generation and storage segment. The company expect selling, general and administrative expenses to be essentially flat in the second half of 2017 compared to the first half of 2017, but then continue to increase in absolute amounts while declining significantly as a percentage of revenue due to the significant increase in revenue primarily driven by the ramp in Model 3 sales and as The company focus on increasing operational efficiency while continuing to expand its customer and corporate infrastructure.

Automotive Financing Options

The company offer loans and leases for Its vehicles in certain markets in North America, Europe and Asia primarily through various financial institutions. The company offered resale value guarantees or similar buy-back terms to all direct customers who purchase vehicles and who financed their vehicle through one of Its specified commercial banking partners. Subsequent to June 30, 2016, this program is available only in certain international markets. Resale value guarantees available for exercise within the 12 months following June 30, 2017 total $222.9 million in value.

Vehicle deliveries with the resale value guarantee do not impact its near-term cash flows and liquidity, since The company receive the full amount of cash for the vehicle sales price at delivery. However, this program requires the deferral of revenues and costs into future periods as they are considered leases for accounting purposes. While The company do not assume any credit risk related to the customer, if a customer exercises the option to return the vehicle to it, The company are exposed to liquidity risk that the resale value of vehicles under these programs may be lower than Its guarantee, or the volume of vehicles returned to it may be higher than Its estimates or The company may be unable to resell the used cars in a timely manner, all of which could adversely impact Its cash flows. Based on current market demand for Its cars, The company estimate the resale prices for Its vehicles will continue to be above Its resale value guarantee amounts. Should market values of Its vehicles or customer demand decrease, these estimates may be impacted materially.

The company currently offer vehicle leases in the U.S. directly from Tesla Finance, Its captive financing entity, as well as through leasing partners. Leasing through Tesla Finance is available in 39 states and the District of Columbia. The company also offer financing arrangements through Its entities in Canada, Germany and the United Kingdom. Leasing through Its captive financing entities and Its leasing partners exposes it to residual value risk and will adversely impact Its near-term operating results by requiring the deferral of revenues and costs into future periods under lease accounting. In addition, for leases offered directly from Its captive financing entities (but not for those offered through Its leasing partners), The company only receive a limited portion of cash for the vehicle price at delivery and will assume customer credit risk. The company plan to continue expanding Its financing offerings, including Its lease financing options and the financial sources to support them, and to support the overall financing needs of Its customers. To the extent that The company are unable to arrange such options for Its customers on terms that are attractive, Its sales, financial results and cash flows could be negatively impacted.

Energy Generation and Storage Financing Options

Tesla Motors offer Solar Loans, whereby a third-party lender provides financing directly to a qualified customer to enable the customer to purchase and own a solar energy system designed, installed and serviced by it. The company enter into a standard solar energy system sale agreement with the customer. Separately, the customer enters into a loan agreement with a third-party lender, who finances the full purchase price. The company are not a party to the loan agreement between the customer and the third-party lender, and the third-party lender has no recourse against it with respect to the loan.

Gigafactory 1

The company is developing Gigafactory 1 as a facility where The company work together with Its suppliers to integrate production of battery material, cells, modules, battery packs and drive units in one location for vehicles and energy storage products. The company broke ground on Gigafactory 1 in June 2014, began assembling Its energy storage products in the first portion of the facility in the fourth quarter of 2015 and began production of lithium-ion battery cells for Its energy storage products in the first quarter of 2017. At Gigafactory 1, The company are now producing drive units, as well as company's proprietary form factor cells, which are then assembled into battery packs, for Model 3. The company also continue to invest in construction of the building at Gigafactory 1 and in production equipment for battery, module and pack production.

Panasonic has partnered with it on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply it with battery cells. Under Its arrangement with Panasonic, The company plan to purchase the full output from their production equipment at negotiated prices. As these terms convey to it the right to use, as defined in ASC 840, Leases, their production equipment, The company consider them to be leased assets when production commences. This results in it recording the value of their production equipment within property, plant and equipment, net, on Its consolidated balance sheets with a corresponding liability recorded to financing obligations. For all suppliers and partners for which The company plan to purchase the full output from their production equipment located at Gigafactory 1, The company will apply similar accounting. During the three and six months ended June 30, 2017, The company recorded $115.5 million and $266.5 million, respectively, on Its consolidated balance sheet.

While The company currently believe that Its progress at Gigafactory 1 will allow it to reach Its production targets, Its ultimate ability to do so will require it to resolve the types of challenges that are typical of a production ramp, such as those that The companyhave experienced to date, including at Gigafactory 1. Moreover, given the size and complexity of this undertaking, it is possible that future events could result in the cost of building and operating Gigafactory 1 exceeding Its current expectations and Gigafactory 1 taking longer to expand than The company currently anticipate. In addition, The company continue to expand production capacity at Its Fremont Factory and are exploring additional production capacity in Asia and Europe.

Gigafactory 2

The company is an agreement with the Research Foundation for the State University of New York (“Foundation”) for the construction of an approximately 1.0 million square-foot manufacturing facility capable of producing 1.0 gigawatts of solar cells annually in Buffalo, New York, referred to as Gigafactory 2. In December 2016, The company entered into an agreement with Panasonic under which it will manufacture custom photovoltaic (“PV”) cells and modules for it, primarily at Gigafactory 2, and The company will purchase certain quantities of PV cells and modules from them during the 10-year term, with the intent to produce PV cells and modules totaling approximately 1.0 gigawatts annually beginning in 2019.

The terms of Its agreement with the Foundation, among other things, require The company to comply with a number of covenants during the term of the agreement. Any failure to comply with these covenants could obligate the company to pay significant amounts to the Foundation and result in termination of the agreement. Although The company continue to remain on track with Its progress at Gigafactory 2, Its expectations as to the cost of building the facility, acquiring manufacturing equipment and supporting Its manufacturing operations may prove incorrect, which could subject it to significant expenses to achieve the desired benefits.

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