Tesla Case: High Growth Valuation

Executive Summary
The Tesla Motor Company is an automobile and technology company that is focused on the research, production, and selling of electric-powered cars directly to consumers. Founded in 2003, Tesla has experienced rapid growth in many areas, including triple digit sales growth some years. However, they have been unable to make a profit to date, and have encountered large losses, totaling over $1 billion over the firm’s lifetime. They also have had difficulties with reliability, and have a history of delaying releases of different models. Being a relatively young firm, projecting revenues, releases, and growth into the future is a very difficult task. Obviously, Tesla has the potential to be a very profitable and valuable company and, therefore, it is important to find an accurate method of valuing them. Each of the three methods have their positives and drawbacks. Precedent transactions and comparables both rely on similar companies in the marketplace. However, Tesla is a very innovative company, and is difficult to compare to any other firm. There are no other firms that are researching and distributing electric cars exclusively. Although there are some automobile firms that have begun to produce electric cars, they have too many significant other components to their business that makes any comparable unreliable.
Upon further research and consideration, we have decided that a Discounted Cash Flow model, while forecasting ten years into the future, is the most effective way to model Tesla. It will produce the most accurate result, and will be able to capture all of the growth opportunities associated with this fast-growing company.

Statement of Tesla’s Situation and Problems There are several major problems when it comes to valuing Tesla. These include: Concerns over the long term viability of the company, inconsistent and poor guidance, timing and potential of new vehicle releases, large variability in the company’s revenues and costs, and finally the challenge of using traditional valuation methodologies with an innovative and one of a kind company which is also growing extremely quickly. The first major problem with valuing Tesla is the company’s limited operating history and concern over the long-term viability of the company. Tesla was founded in 2003, so the company is only 12 years old. Also it has only been a public company for 4 years, and most importantly has only been selling cars for 5 years. Also at the time the case was written Tesla had sold less than 2,500 cars total. Tesla has no experience manufacturing and delivering a large volume of vehicles and it is unknown whether or not the company will able to do this successfully. Because of this there is a lot of investor concern over whether or not Elon Musk will be able to execute his long term vision for the company. There are also concerns over the feasibility of creating a mass market electric vehicle with today’s technology. Research by Gartner, a technology research and consulting firm, suggested that electric vehicles may not be mass produced for at least 10 more years. This is because the battery technology still needs to improve enough to reduce costs and increase capacity. Today’s electric vehicles really do not offer much if any savings over gas vehicles even over the entire lifetime of a car. This is a problem for Tesla because it may not be able to remain in business long enough for this improvement in battery technology to happen. The reason Tesla may not be able to stay in business long enough is its history over losing money. Over the entire lifetime of the firm Tesla has lost over $1 Billion. Between 2003 and 2009 Tesla lost $236.4 million on revenues of 108.2 million. In 2012 Tesla produced a loss of $396 million which was not only a 56% increase from the year before but also a $30 million larger loss than what estimates projected. In a 2012 Q4 letter to shareholders