Tesla Motors



Tesla Motor’s annual report (10k) filing was recently released on the 23rd of February 2016 for the period ended 31st December 2015, and sequel to that, Tesla filed an 8k report detailing explanations to some controversies in the earlier released statement (10k).



Before we delve into it, let’s take a look at Tesla Motors and their business. Tesla Motors, Inc. is an American automotive and energy Storage Company that designs, manufactures, and sells luxury electric cars, electric vehicle power train components, and battery products. Tesla became public in 2010, making it the first American company to go public since Ford Motors Company in 2010. Tesla Motors has been on the innovative front, bringing out new features and models, while also consistently meeting and even surpassing the creative imagination of a curious public.

Tesla Motors is named after electrical engineer and physicist Nicola Tesla (1856-1943), who developed the first modern alternating current (AC motor). Tesla Motors was incorporated in July 2003 by Martin Eberhead and Marc Tarpening. The duo financed the company until Elon Musk led its Series A financing round in February 2004. Following this, Elon musk joined Tesla’s board of directors as its chairman.

In February 2005, Musk led another round of financing, the Tesla Motor’s series B, $13 million investment round which saw Valor equity partners added to the funding team. In May 2006, Musk and Technology partners led a third round of financing which saw prominent names jump on board the funding team. Investors included Google Co-founders Sergey Bin & Larry page, Hyatt heir Nick Pritzker, and former ebay president Jeff skoll. The third round of financing saw Tesla Motors obtain a finance of $40 million dollars. Yet again, in 2007, Tesla motors had a fourth round of financing which added another $45 million and brought the total investments to over $105 million through private financing.

In 2007, Tesla faces some challenges and makes a decision to change its leadership. This takes effect in December 2007 when they bring in Ze’ev Drori, a successful high tech entrepreneur and proven chief executive. According to Musk, Tesla was forced to reduce the company workforce by about 10% to lower its burn rate, which was out of control in 2007. By January 2009, Tesla had raised US$187 million and delivered 147 cars. Musk had contributed US$70 million of his own money to the company.

In June 2009, Tesla received funding from a federal institution; the United States Department of Energy. It was in the form of an interest bearing loan to the tune of $465million. The main purpose of the funding was to support engineering and production of the Model S sedan, as well as the development of commercial powertrain technology. The loan granted by the United States Department of Energy was part of the US$8 billion Advanced technology Vehicles Manufacturing Loan program. Tesla motors were not the only beneficiary of this loan, as other top car manufacturers such as Ford and Nissan were granted loans. Tesla Motors repaid the loan in May 2013. Tesla Motors was the first car company to fully repay the loan.

Tesla gained widespread popularity from their award winning roadstar; the first full electric sports car. In fact, in the month of july 2009, the company for the first time earned a profit; earning US$1million on US$20million in revenue. The profitability of Tesla during this period arose primarily from improved gross margin on the 2010 Roadstar, the second iteration of Tesla’s award winning sports car. On the back of Tesla’s profitability in July 2009, Tesla’s Ceo, Elon Musk said: “We achieved bottom-line profitability thanks to a tremendous amount of hard work by the Tesla team to improve quality, while simultaneously reducing costs on the Roadster; this also shows there is a strong demand for the car… Moreover, customers know that in buying the Roadster they are helping fund development of our mass-market electric cars.” In September 2009, Tesla announced an US$82.5 million round to accelerate Tesla’s retail expansion.

On June 29, 2010, Tesla raised $226 million in its initial public offering, becoming the first American car company to go public since Ford in 1956. The IPO was underwritten by a coalition of top Investment banks including Goldman sachs, Morgan Stanley, J.P Morgan and Deutsche Bank securities.13,300,000 shares of common stock were issued to the public at a price of US$17 per share. The initial public offering raised US$ 226 million for the company.

Tesla’s Corporate Strategy

Tesla seeks to target affluent customers and plans on developing newer models of its range of electric cars by developing battery and electric drive train technology for newer models which would be backed by finance gotten from the sale of the former types. Tesla has a three step strategy for this. The first step in its three step strategy was to make the Tesla Roadster high price, low volume. The Model S is step two with mid-price, mid volume. The third generation will be low price, high volume.

One of Tesla’s stated goals is to increase the number and variety of electric vehicles (EV) available to mainstream consumers by: selling its own vehicles in company-owned showrooms and online, selling powertrain components to other automakers, and serving as a catalyst and positive example to other automakers.

Tesla’s Super Charger Network

Tesla’s Super charger stations were announced in 2012 with six stations operational. They are now about 200 supercharger stations worldwide. Tesla’s supercharger stations serve the purpose of charging Tesla vehicles. Since Tesla’s vehicles are electric, then they need to be charged. They do not run on PMS (Premium motor spirit) like other vehicles. Without the ability of charging these electric cars, they would be rendered useless. Tesla knowing this, developed a Supercharger Network as a strategic corporate initiative designed to remove a barrier to the broader adoption of electric vehicles caused by the perception of limited vehicle range and to provide fast charging to enable long distance travel. The Tesla Supercharger is an industrial grade, high speed charger designed to replenish 170 miles of range in the battery pack in as little as 30 minutes. Supercharger stations typically have between four to ten Superchargers and are strategically placed primarily along well-travelled highways to allow Model S and Model X owners to enjoy long distance travel with convenient, minimal stops. As of December 31, 2015, we had 584 Supercharger stations open in North America, Europe, and Asia. They are planning to continue to expand the Supercharger network in the United States, Europe and Asia.

Apart from that, Tesla is also working with a wide variety of hospitality locations, including hotels and popular destinations to offer an additional charging option for their customers. This additional charging option is in the form of a wall connector by Tesla, deployed to their various charging partners. These wall connectors are to provide charging to model S owners that patronize their business. As of

December 31, 2015, over 1,800 locations around the world had more than 3,100 Tesla wall connectors installed.

The Super Charger Network Mystery

In the Quarterly statement (2015) of Tesla, there was a change in how the supercharger network is accounted for. This change occurred in their Q3 2015 to Q4 2015 statement, and there is little explanation or disclosure of what it consisted of.

In Tesla’s Q3 2015 statement (September 30, 2015), notes on the valuation of Tesla’s Super charger network stated: “As of September 30, 2015 and December 31, 2014, the net book value of our Supercharger network was $152.4 million and $107.8 million and currently includes 536 locations globally. We plan to continue investing in our Supercharger network for the foreseeable future, including in North America, Europe and Asia and expect such spending to be approximately 5% of total capital spending over the next 12 months. During 2015, this investment will grow our Supercharger network by about 50%. We allocate Supercharger related expenses to cost of automotive revenues and selling, general, and administrative expenses. These costs were immaterial for all periods presented.”

Just three months later on December 31, 2015, Tesla stated in her Q4 report that “As of December 31, 2015 and December 31, 2014, the net book value of our Supercharger network was $339.2 million and $107.8 million and as of December 31, 2015 included 584 locations globally. We plan to continue investing in our Supercharger network for the foreseeable future, including in North America, Europe and Asia and expect such spending to be a minimal portion of total capital spending during 2016. During 2016, this investment will grow our Supercharger network by about 50%. We allocate Supercharger related expenses to cost of automotive revenues and selling, general, and administrative expenses. These costs were immaterial for all periods presented.”

Let us break this down further. In September 2015, the Super Chargers were 536 and had a book value of US$152.4 million. That meant that their Super Charger network had a valuation of approximately $285,000 apiece. Three months later their Super charger network has a book value of $339.2 million with an increase of only 48. This brought the individual valuation from US$285,000 to US$580,000, and $3.89 million per each new supercharger.

In a comparison of the two statements above by Tesla, you would see that in the Q3 statement, Tesla said it plans to continue investing in their supercharger network and spendings would be an approximate 5% of total Capex. In Q4 2015, they rephrase it by saying that they intend to continue investing in their supercharger network, but they expect such spending to be a minimal portion of total capital spending, while expecting it to grow by about 50%. We take the minimal portion to be below the 5% first stated, Total Capex for 2015 amounted to 1.63 billion dollars and Total Capex expected for 2016 is 1.5 billion dollars. With the expected Spendings on Tesla’s supercharger network set at a minimal portion of Capex (whatever this means; assuming it is lower than the 5% talked about in the 3rd quarter), I am curious to know how Tesla would grow their supercharger network by 50% in 2016 with a 8% reduction in Capex in 2016. That is 292 additional supercharger networks to be added in 2016, while only 204 supercharger networks were installed in 2015.

That’s by the way; let’s take a look at possible reasons for the drastic change in valuation of Tesla’s super charger network.

There might have been a reclassification of assets by Tesla during this period. In this reclassification, an already existing item in the balance sheet must have been added to the supercharger network

Capitalization of costs associated with the super charger network in order to place a higher value on it, and to window dress profits. Such costs are costs which could have been set off against revenue in the current period, but instead they are capitalized and taken to the balance sheet. The effect would be to inflate reported earnings at the net profit and operating income level for sure, and perhaps even at the gross margin level and inflate Capex

Tesla felt that the intrinsic value of its Supercharger network has increased, and it is now expected to generate revenue for the company, by maybe charging customers for a charge instead of it being free like it is today.

The jump from $152.4 million to $339million is clearly material for Tesla Motors, but in their recent 8k filling, they had this to say: “An immaterial error that overstated the cost and resulting net book value of the Supercharger network was included in Tesla Motors, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Form 10-K”). In Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation-Management Opportunities, Challenges and Risks-Trends in Cash Flow, Capital Expenditures and Operating Expenses, the net book value of the Supercharger network as of December 31, 2015 should have been stated as $166.6 million.

This error was limited to the section of the Form 10-K referenced above, and did not impact the consolidated financial statements or the notes included in Item 8, Financial Statements and Supplementary Data. Management has determined this error to be immaterial.”

Well this is a mystery because we do not know if the figures where reverted because of the wide debate in regards to the valuation of their super charger network, or if it was truly an error on their part. You be the judge of it.

Hi, why stop at Tesla Motor’s? Check out Mcdonalds case study analysis here: Mcdonalds case study analysis or Pepsi co’s market penetration strategy

Recommended Readings

Joshua Rosebaum., Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions.

Benjamin Graham., David Dodd., and Warren Buffet., Security Analysis: Sixth Edition, Foreword by Warren Buffett.

Micheal Shearn., The Investment Checklist: The Art of In-Depth Research.

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