Tesla 2020: Still No Profit, More Share Dilution

| About: Tesla Motors (TSLA)

Summary

Our analysis indicates that Tesla will not turn a profit by 2020.

We assess that Tesla is running out of effective levers to raise additional capital.

Our Take: We support a long (albeit speculative) position in Tesla should the stock fall to $75/share based on Tesla's brand recognition, patent value and buyout potential.

Tesla: Sales Do Not Justify Current Valuations

Our analysis indicates that Tesla (NASDAQ: TSLA) will not turn a profit by 2020.

For our analysis we focused on Tesla's automotive business exclusively as Tesla Mobility is still largely speculative and Tesla Energy is still nascent. We assess the majority of Tesla's revenue over the next five years will be realized via its automotive business, especially as competitive and regulatory headwinds in the driverless vehicle segment (Tesla Mobility) will be significant.

Our analysis looks at each current and concept car model (S, X and 3) individually and we have used Tesla's own sales projections and quarterly financial data to extrapolate our forecast for Tesla's sales and profitability (or lack thereof) in the coming years. A global view of sales projections and total revenue for Tesla is included below.

   

Cars Sold / Projected to Be Sold

 

Year

Model S

Model X

Model 3

 

2015

50,580

208

0

Projection

2016

50,000

50,000

0

Projection

2017

45,000

70,000

10,000

Projection

2018

45,000

80,000

60,000

Projection

2019

45,000

75,000

190,000

Projection

2020

45,000

75,000

350,000

Click to enlarge

Our sales projections are based on Tesla forecasts indicating sales of ~500,000 units per year by 2020.

Below is a table showing how the above sales projections translate into future Tesla revenues.

 

Cars Sold / Projected to Be Sold

Average Revenue Per Vehicle

Total Revenue

Year

Total

Total

Total

2015

50,580

$80,071

$4,050,000,000

2016

100,000

$92,694

$9,269,427,460

2017

125,000

$93,320

$11,665,009,255

2018

185,000

$82,544

$15,270,686,533

2019

310,000

$67,608

$20,958,566,724

2020

470,000

$61,554

$28,930,449,165

Click to enlarge

Despite this aggressive sales forecast and anticipated growth trajectory, our analysis shows that investors who are expecting the company to turn the corner toward profitability will have to wait until after 2020 before Tesla possibly generates its first profit. The below chart shows a global view of where we see Tesla's profit and EPS between 2016 and 2020. The rest of the article will provide support for this chart.

Year

Profit Margin

Total Profit

Shares

Profit Per Share (EPS)

2015

-21.94%

-$888,760,000

128,233,766

-$6.93

2016

-7.20%

-$667,398,777

128,233,766

-$5.20

2017

-8.36%

-$975,614,599

128,233,766

-$7.61

2018

-7.02%

-$1,071,341,239

128,233,766

-$8.35

2019

-3.97%

-$831,264,961

128,233,766

-$6.48

2020

-0.55%

-$158,854,456

128,233,766

-$1.24

Click to enlarge

Further, Tesla's capital intensive growth model requires significant spending on infrastructure including charging stations and physical plant upgrades to achieve manufacturing scale for the efficient production of the mass market Model 3. As Tesla's sales figures expand so too will its expenses on infrastructure, R&D, marketing and operations as the below charts show.

Tesla's lofty goals are already causing the company to spend an exorbitant amount of money in pursuit of growth, and as sales grow we anticipate that Tesla's growth targets will cause profits to continue to prove elusive. Even with a capex growth rate projected to decline significantly yoy (15% by 2020), Tesla will still struggle to make a profit as expenses continue to exceed gross income.

 

Cost of Goods Sold

Cost of Goods Sold

Gross Income

Average Gross Margin

Year

Total

Per Vehicle Sold

Total

 

2015

$3,126,600,000

$61,815

$923,400,000

22.8%

2016

$7,155,997,999

$71,560

$2,113,429,461

22.8%

2017

$9,025,547,145

$72,204

$2,639,462,110

22.6%

2018

$11,913,558,803

$64,398

$3,357,127,729

22.0%

2019

$16,586,380,647

$53,504

$4,372,186,077

20.9%

2020

$23,105,334,927

$49,160

$5,825,114,239

20.1%

Click to enlarge

Year

Expenses (Excludes COGS)

Expenses % Increase (yoy)

Expenses / Revenue

2014

$1,175,710,000

121.7%

 

2015

$1,812,160,000

54.1%

45.0%

2016

$2,780,828,238

53.5%

30.0%

2017

$3,615,076,709

30.0%

31.0%

2018

$4,428,468,969

22.5%

29.0%

2019

$5,203,451,038

17.5%

24.8%

2020

$5,983,968,694

15.0%

20.7%

Click to enlarge

Sales Projections: Model 3 Sales Are Largely Speculative

We have forecasted Model 3 sales numbers based on Tesla's own forecasts. Some argue that Tesla's Model 3 sales forecasts are too conservative based on aggressive pre order "sales." However, we note that the Model 3 "sales" were not actually sales. They were merely fully refundable $1,000 deposits allowing customers the future opportunity to purchase the car. The deposit was likely a PR mechanism to build confidence in Tesla's future mass market sales efficacy as well as a creative mechanism to provide Tesla additional capital.

Although current Tesla marketing suggests the base Model 3 will start at USD $35,000, recently Elon Musk stated he anticipates the average selling price will fall closer to $42,000. It is worth noting that anything above $35,000 starts to move the Model 3 outside of the mass market price point (occupied by Nissan and Chevrolet) and instead puts it in a category with luxury rivals such as BMW, Audi and Mercedes.

We are skeptical Tesla will be able to generate significant gross income from the Model 3 even at a $42,000 price tag. We assess instead that Tesla will keep the sales price low and margins narrow to ensure they are able to "achieve" a mass market sales success, something which they have been promising investors and is one of many prerequisites for continued share price support.

 

Revenue Per Vehicle

Total Revenue

Gross Margin

Gross Income

Year

Model 3

Model 3

Model 3

Model 3

2015

$0

$0

18.0%

$0

2016

$0

$0

18.0%

$0

2017

$42,000

$420,000,000

18.0%

$75,600,000

2018

$43,260

$2,595,600,000

18.0%

$467,208,000

2019

$44,558

$8,465,982,000

18.0%

$1,523,876,760

2020

$45,895

$16,063,086,900

18.0%

$2,891,355,642

Click to enlarge

*Model 3 average Revenue Per Vehicle based on CEO Elon Musk projections of approx. USD $42,000 sales price

*Model 3 Revenue per Vehicle for years 2018 - 2020 based on a projected 3% yoy price increase for inflation only

*Model 3 Gross Margin based on average of Ford, GM, and Honda gross margins and industry average found here 18% gross margin is generous considering gross margins of current mass market electric vehicles remain in question and industry average for combustion engine mass market vehicles is below 18%

Model S: Will The 3 Cannibalize The S?

Our projection for Model S sales, Tesla's highest margin vehicle, are kept constant between now and 2020. While arguments can be made that demand for the Model S will increase between now and 2020, there are equal arguments to be made that the Model 3 will cannibalize Model S sales, especially based on the number of potential overlapping features revealed at the Model 3 launch. Either way, the volumes associated with the Model S will not have a significant impact on Tesla's ability to operate as a profitable entity or justify current valuations. The Model 3 and subsequent mass market models will determine Tesla's fate in these categories.

   

Revenue Per Vehicle

Total Revenue

Gross Margin

Gross Income

 

Year

Model S

Model S

Model S

Model S

 

2015

$79,989

4,029,200,000

22.8%

918,657,600

Projection

2016

$82,389

4,119,427,460

22.8%

939,229,461

Projection

2017

$84,860

3,818,709,255

22.8%

870,665,710

Projection

2018

$87,406

3,933,270,533

22.8%

896,785,681

Projection

2019

$90,028

4,051,268,649

22.8%

923,689,252

Projection

2020

$92,729

4,172,806,708

22.8%

951,399,929

Click to enlarge

-Total revenue based on 2015 financial statements (all vehicles sold were model S with the exception of 208 Model X in Q4 '15)

-Model S Revenue per vehicle based on (average Q2, Q3 total revenue) / vehicles sold (only model S was sold in these quarters)

-Model S Revenue per Vehicle for years 2016 - 2020 based on a projected 3% yoy price increase for inflation only.

-Model S 2015 Gross Margin based on 2015 financial statements.

-Model S Gross Margin for years 2016 - 2020 assumed to be constant at 23%. Although we expect increased efficiencies in production between 2015 and 2020, we assess that increased competition will cause either a) increased pressure on average revenue per vehicle or b) increased feature offerings at the current average revenue per vehicle.

Additionally, given the high volume and fast rate of capital burn at Tesla, a delay in the release of the Model 3 could result in market share loss to competitors that are rapidly entering the market. It also will likely precipitate the need for Tesla to turn to equity or debt markets for additional capital. Both options, which we will explore in more detail later, would weigh on profitability and ultimately dilute shareholder returns. However, for the sake of keeping our estimates as optimistic as possible we have not included these highly probable downside risks in our calculations.

Model X: Recalls and Quality Are The X Factor

In analyzing the Model X, we are of similar mind to the arguments made with the Model S. However, the recent Model X recall (of 2,700 autos) due to a faulty third row seat raises concern over Tesla's ability to maintain quality as operations scale higher. The Model X recall combined with previous quality issues with the November 2015 90,000 unit Model S recall (due to seat belt issues) casts doubt on initial Model 3 production quality. As production scales the margin of error will narrow for Tesla. A recall of the Model 3 would cause damage (both financial and reputational) magnitudes greater than the Model S and X issues to date.

   

Revenue Per Vehicle

Total Revenue

Gross Margin

Gross Income

 

Year

Model X

Model X

Model X

Model X

 

2015

$100,000

$20,800,000

22.8%

$4,742,400

Projection

2016

$103,000

$5,150,000,000

22.8%

$1,174,200,000

Projection

2017

$106,090

$7,426,300,000

22.8%

$1,693,196,400

Projection

2018

$109,273

$8,741,816,000

22.8%

$1,993,134,048

Projection

2019

$112,551

$8,441,316,075

22.8%

$1,924,620,065

Projection

2020

$115,927

$8,694,555,557

22.8%

$1,982,358,667

Click to enlarge

*Model X calculation assumptions same as the Model S calculation assumptions.

Another Tesla Stock Offering On The Horizon

We assess that Tesla is running out of effective levers to raise additional capital. In 2014 Tesla issued low-yield convertible debt and was able to attract interest based on the prospect for further share price appreciation. However, following that offering S&P issued a B- junk rating for Tesla bonds. S&P's stated reasons for downgrades were due to Tesla's...

narrow product focus, concentrated production footprint, small scale relative to its automotive peers, limited visibility on long t-erm demand for it's products, and limited track record in handling execution risks.

We concur with S&P's concerns. Additionally, their B- rating combined with their exploding cash burn rate and need to service approximately $2.24 billion of long-term debt will likely hinder Tesla's ability to repeat a low interest convertible debt offering. Investors should realize they are "investing" new money to service growing debts as Tesla will not generate profits for at least the next five years.

Due to the aforementioned circumstances, Tesla was forced to announce a secondary stock offering of 3.1 million shares to raise $738 million. The secondary offering was precipitated by Tesla's high cash burn rate as Tesla burned through anywhere from $400 to $600 million per quarter in 2015. We expect this pattern to continue through 2016.

We calculate Tesla's current cash position of $1.22 billion (as of December 31, 2015) to be insufficient to fuel future growth without the help of additional fundraising activities. With no profit generation this leaves Tesla with 3-4 quarters of operating capital at best until they need to revisit debt or equity markets. Either outcome will likely weigh on Tesla's share price.

We assess it unlikely Tesla will find this money in debt markets, having exhausted the market's appetite for convertible debt. Therefore, an additional share offering is likely within the next 12 months. Such an offering will further dilute share price and will only degrade our negative EPS guidance further.

Oil Will Be Lower For Longer, Macro Trends Are Moving Against Tesla

On a macro level, we assess that weakness in energy markets will work against Tesla. Gas guzzling SUV sales are driving current growth in the automotive industry. This trend indicates a strong consumer response to low fuel prices and automakers' desire to capitalize on this trend to drive profits through the sale of higher profit margin vehicles. In the United States, sales of passenger cars declined slightly in 2015, while sales of SUVs and crossovers rose 16%. SUVs and crossovers accounted for 35% of US auto sales in 2015.

Additionally, investors should remember that oil was trading at USD $100 per barrel in 2013 when Tesla first announced its Gigafactory. Oil is now trading around $40 per barrel, making the economics of electronic vehicles and battery use for energy storage less attractive. We assess this low oil price trend will persist and have outlined our thesis for the oil market in an article titled: USO: Momentary Lapse of Reason, No Upward Oil Price Catalyst In Sight.

Our Take: Negative P/E, Difficult to Target The Price

We worked diligently to deliver a price target for Tesla, but have to disclose that since our estimates show losses through 2020 a PE ratio is impossible to calculate. Therefore, the price target we gave Tesla is largely speculative.

Year

Share Price Based on PE = 30

Share Price Based on PE = 100

2015

-$207.92

-$690.30

2016

-$156.14

-$520.45

2017

-$228.24

-$760.81

2018

-$250.64

-$835.46

2019

-$194.47

-$648.24

2020

-$37.16

-$123.88

Click to enlarge

Our analysis supports the assertion that any purchase of Tesla stock between now and 2020 (at the earliest) would have to be made based on the belief that:

1) Tesla will be able to profitably deliver subsequent mass market models and iterations of the Model 3 after the initial release to drive profitability.

2) Tesla will be able to tap debt or equity markets repeatedly over the next 5+ years to maintain their current growth trajectory.

3) Tesla will be able to significantly monetize nascent non-automotive businesses such as Tesla Energy (battery production) and Tesla Mobility.

With the above understood, we would only feel comfortable taking a long (albeit speculative) position in Tesla should it fall below $75/share, the price that equates to a Tesla market cap of USD $10B. Without a forecast for profit, the risk of further share dilution, and a rapid cash burn rate, we assess that the value of Tesla stock is driven solely by its market leading technology, brand recognition, patent value and buyout potential (the sum of which we perceive to be worth approximately $10B). The catch 22 for investors in this situation is that a $75 stock price would imply that Tesla has run out of momentum, the very momentum that the company needs to raise required capital to navigate the next 5-plus years of unprofitable business.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes only.