Tesla – Financing Growth Case Study Solution

Introduction

Tesla, Inc. is an American based Organization operating in the vehicle and clean energy industry and is headquartered in Palo Alto, California. The organization was established in 2003 by Elon Musk, the Board Chairman and Head of Product Design, J.b Straubel, Martin Eberhard and Ian Wright. The organization was founded with the aim to create effective electric cars and sell them to the wider population. In order to achieve this aim, the organization employed a 3 stage strategy.

The first stage comprised of launching a sport car, an effective type of electric vehicle which offered significant return in investment. In 2016, the company had a market capitalization of $32 billion, revenue amounting 4 million and year end assets worth 8 billion. The major competitors of the organization included Volkswagen, Toyota motors, BMW and Daimler. Moreover, the organization secured a share of 1.29% in the U.S market I the year 2019. (Statista, 2020)

The case report demonstrates multiple approaches used to evaluate the equity market value of the organization. Moreover, various Wall Street analysts determine the target share price of the company based on the growth prospects for the company. One of the analysts determined a target share price of $160 to $500. Moreover, the case determines in detail the valuation methods used by two analysts Dougherty and Company Analysis, J.P. Morgan Analysts and Morgan Stanley Analysis.

Industry Background

Currently, the company is manufacturing two electric cars which includes model S which is a Sedan and model X which is a Sports Utility Vehicle (SUV), these models increased the customer base of the organization as large quantities of these models were introduced. Moreover, the model S had been highly treasured and praised by Wall Street Journal and Motor Trend as positive reviews were given.

The company is planning to expand its production line and develop new models which includes Model 3 in order to target large market. The model had become popular because it is a compact executive, mid-size luxury all-electric car, additionally it tends to benefit from advances in battery technology, due to which the company had received around 3,25,000 reservations within first week.

On the other hand, the firm’s projected to deliver 90,000 vehicles in 2016 andachieve the Tesla annual production of 5,000 units within the next two years. The company started to take orders from March 2016 and received 325,000 orders at its first week of reservations, which shows the almost $14 billion future sales for Tesla Motor’s Model 3.

In order to achieve the targeted annual production and expansion of product line, the organization needed to raise additional capital for which the organization proposed to issue 6.8 billion common shares at a price of $215 per share. This will allow the organization to raise $14 billion excluding the underwriting fee. Moreover, these shares include the 2.8 million shares of Tesla’s CEO, Elon Musk. Elon Musk has approximately 27% equity holds of Tesla Motors and he is considering to sell some of his shares to pay off his tax liability.

Pros and Cons of the three Analysts Reports

J.P. Morgan:

J.P Morgan estimates the share price for the organization’s shares using DCF and market multiples approach and then apply 50% weights to each of the approach to determine the final share price. The approach appears to be complex and ignores the importance of the concept of time value of money and cost of capital which are crucial for assessing the value of the company. On the other hand, using a combination of both the approaches requires more time and the share price estimated might be unreliable. Moreover, the approach is too complex, costly and time consuming as the organization will need to determine the share price using two methods.

Morgan Stanley:

Morgan Stanley determines the target share price by using scenario based valuation approach. A higher share price is assumed in the bull case, a lower price is assumed in the bear case i.e. in the worst case scenario and a most likely price is assumed in the base case. The approach has various weaknesses which includes that the approach determines the share price on hypothetical situations and outcomes and not an actual situation.

Moreover, the approach is based on qualitative aspects and is considered to be more time consuming and costly as the share price for three different scenarios will need to be determined and a deeper knowledge and understanding of the organization will be required to analyze the impact of firm’s decision And the situation in the external environment in which the firm operates.

Dougherty:

The Dougherty and Company Analysis uses a qualitative approach to determine the share price of the company. The analysts looked at the growth prospects of the company, the customer’s perspective in relation to Tesla’s cars, the satisfaction and trust of the employees and investors’ of the firms’, the sales representatives and the third party supplier. This approach appears to be extremely time consuming and subjective as share price is determined after liaising with the firm’s investors and assessing the future growth and demand of the industry.

Analyst Report Comparison

J.P Morgan share price valuation approaches comprises of using Discounted Cash Flow methods and Market Multiples Method whereas Morgan Stanley values the equity of the organization using scenario based valuation approach i.e. share price is calculated under there scenario base case, bull case and bear case. On the other hand, Dougherty and Company values the shares of Tesla using qualitative measures which includes growth prospects for the organization, analyzing the management of the firm, robotic supplier, customers, sales resprestentaives, third party suppliers and competitors. Therefore, the evaluation of share price calculated by methods used by J.P Morgan and Morgan Stanley has been done below.

DCF Valuation Method:

Discounted cash flow valuation method estimates the value of the company based on its projected cash flows. DCF valuation method could be considered as an income based approach. DCF valuation indicates that price of any assets must be at least equal to its future cash flows. DCF valuation could be used by investors to measure the fair price value of the share. Investor must consider the factor which can affect the company’s performance………………………….

 

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