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Summary

  • Thank you to Seeking Alpha readers for debating the Tesla story this past weekend.
  • An interactive valuation model is provided, will be updated periodically.
  • Guaranteed Buybacks could be presented differently on the Cash Flow Statement.

On Friday, I published an article explaining that I was considering a short position in Tesla Motors (NASDAQ:TSLA), and received very thoughtful feedback from readers. And after reading the analyst upgrades and watching the shares gap up on Monday morning, I'm probably not going to be jumping short on the stock in the near term. But, as a gesture of thanks, I am sharing an interactive valuation model in GoogleDocs and hope that it provides a useful tool for analysis and study. It is still very primitive, but these things take time to evolve, and I will update it over time. The link can be found here: LINK

I tortured the model until it delivered a similar value that the sell-side analysts at DB and MS are proposing. A snapshot of the model is here:

(click to enlarge)

As many Seeking Alpha readers have suggested, there are a great deal of arguments back-forth on the merits of the share price. I won't add to this backlog, and I will not comment on batteries, hydrogen cells, ICE vehicles, or any of those areas in which I cannot offer a unique view or opinion.

Rather, I will share my views on the valuation approach and share my research, with the hopes that readers will pick it apart to help me refine it. Despite the variety of feedback I received from those who dismissed the valuation approach, this is what the sell-side analysts are doing to set price points! Obviously, their models will be more sophisticated (or at least more complicated) but the kernel of the approach is the same (i.e., we are not discounting expected cash flows to the shareholder).

Analyst Note:

This article will also explore in more detail the guaranteed resale value treatment in the financial statements. I will argue that the resale value should be considered a source of cash from financing activities, not a part of free cash flow.

Overview of the Resale Guarantee

As I indicated in my prior article, Tesla guarantees to buy back your ModelS in 36 months at about 50% of the car's list price. Currently, the cash flows from the guarantee are added back to Cash Flow from Operations. So far this year, $109 million was recorded into this bucket. As a result, the cash from operations was positive $57million

I'm a retired CPA, so I will let the active ones comment on the appropriateness of the classification, but for a financial analyst's evaluation, I believe these cash flows should be considered financing activities. At the time of sale, the following takes place:

Source: Author's Image, based on review of Company Filing

The gist of this transaction is that Tesla is getting a loan for the guaranteed residual value of the car. The option of calling that loan in lies with the customer, not with Tesla. In my view that loan is financial in nature, not operational.

At the termination of the loan, the following might take place (remember that the option lies with the car buyer).

Source: Author's Image, based on review of Company Filing

Illustrated above, it appears that Tesla will take back the car, do some value-added work to it, and re-sell it as a Certified Pre-Owned car - sort of like they do with the Roadsters (that's my assumption any way).

As the lease operation grows, the guaranteed buy-back will become more and more relevant on the financials. Currently, at $345 million, it is 7% of total assets. Tesla announced in their recent disclosures that they have launched "Tesla Financial", so one should forecast an increase in these leases, not a decrease.

Conclusions

The agreement to guarantee a buy-back value is accurately accounted for as a lease in the company's GAAP figures. I'm not supportive for the change in the buy-back commitment to be recorded as cash flows from operations, but that might be the correct GAAP. I will let the CPAs argue that one. As an analyst, I believe these cash flows should be classified as a financing activity, and that Free Cash Flow should be lowered accordingly.

Source: Tesla - Free Valuation Model, Notes On Guaranteed Buybacks

Additional disclosure: The valuation model is illustrative for educational and discussion purposes - author is not recommending sale or purchase of stock.