ACC 345 Business Valuation Report Tesla Milestone 1 PDF

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Milestone 1 Valuation Report...

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Summary Business Valuation Report of Tesla, Inc.

Tesla, Inc. May 20, 2020

Contents INTRODUCTION.........................................................................................................................................................3 Nature, Background, and History.........................................................................................................................4 Facilities................................................................................................................................................................4 Customers..............................................................................................................................................................4 Management..........................................................................................................................................................4 Competition...........................................................................................................................................................4 Strengths and Weaknesses.....................................................................................................................................4 Ownership.............................................................................................................................................................4 Major Shareholder Transactions..........................................................................................................................4 Business Risks.......................................................................................................................................................4 FINANCIAL ANALYSIS..............................................................................................................................................5 FINANCIAL ANALYSIS OVERVIEW...................................................................................................................................5 BALANCE SHEETS.........................................................................................................................................................5 Assets.....................................................................................................................................................................5 Liabilities...............................................................................................................................................................5 Stockholder’s Equity..............................................................................................................................................6 INCOME STATEMENTS...................................................................................................................................................6 NORMALIZATION ADJUSTMENTS....................................................................................................................................6 ECONOMIC OUTLOOK............................................................................................................................................7 INDUSTRY ANALYSIS...................................................................................................................................................7 Industry Overview.................................................................................................................................................7 Competitive Landscape.........................................................................................................................................7 Products, Operations and Technology..................................................................................................................7 Sales and Marketing..............................................................................................................................................7 Finance and Regulation........................................................................................................................................7 Regional and International Issues........................................................................................................................7 Labor Trends.........................................................................................................................................................7 GENERAL ECONOMIC ANALYSIS.................................................................................................................................7 Interest rates..........................................................................................................................................................7 GDP.......................................................................................................................................................................7

International and Domestic Trade Policy.............................................................................................................7 Monetary Policy....................................................................................................................................................7 Fiscal Policy..........................................................................................................................................................7 BUSINESS VALUATION.............................................................................................................................................8 VALUATION APPROACHES.............................................................................................................................................8 Asset Approach......................................................................................................................................................8 Income Approach..................................................................................................................................................8 Market Approaches...............................................................................................................................................8 SELECTED METHOD - INCOME APPROACH.................................................................................................................8 Prospective Analysis..............................................................................................................................................8 Discount rate.........................................................................................................................................................9 Valuation calculation..........................................................................................................................................10 DISCOUNTS AND PREMIUMS...............................................................................................................................11 DISCOUNT FOR LACK OF CONTROL..........................................................................................................................11 DISCOUNT FOR LACK OF MARKETABILITY...............................................................................................................11 FINAL CALCULATION OF VALUE.......................................................................................................................12 SOURCES....................................................................................................................................................................13

Tesla, Inc. Tesla, Inc. is an American electric vehicle company based in Palo Alto, California. The company specializes in electric vehicle manufacturing, battery energy storage, and solar panel and solar roof tile manufacturing. Tesla Motors was founded in 2003 by engineers Martin Eberhard and Marc Tarpenning in San Carlos California. The company was named after Nikola Tesla, a 19th century inventor and electrical engineer discovered the properties of rotating electromagnetic field lead to the what is known as “alternating current” which is still used today and is a more efficient system than “direct current” which was preferred by Thomas Edison. Nikola Tesla was noted with his contributions to electrical engineering making him an icon among todays engineers. Eberhard and Tarpenning founded Tesla, serving as CEO and CFO respectively, they launched the company to develop and produce an entirely electric car. In 2004 Elon Musk joined Tesla, and soon became the face of the company and later CEO. In 2006 Eberhard and Tarpenning unveiled a prototype for the Tesla Roadster, an entirely electric sports car. While the Roadster was an entirely electric car that has specifications that could meet the needs of consumers, unfortunately the car came with a price tag of about $100,000 which ended up pricing most consumers out of that market. Tesla's long-term strategic goal was to create an affordable market for electric vehicles. Tesla's goal was to start with a premium sports car and then move into mainstream vehicles like sedans and compacts and make them affordable. The Tesla Factory is an automobile manufacturing plant in Fremont, California, operated by Tesla, Inc. The facility opened as the General Motors Fremont Assembly in 1962, and was later operated a GM–Toyota joint venture called (NUMMI) from 1984 until the partnership ended in 2009. Tesla took ownership of the plant in 2010. Tesla has a total of six facilities around 3

the world manufacturing vehicles, lithium ion batteries, photovoltaic cells, solar panels, solar shingles, and supercharger equipment. Tesla’s factory in Fremont, CA is nearly 10 million square feet of manufacturing and office space. Tesla remodel the facility with skylights to provide the employees with natural light, they painted the floor with white epoxy that creates a clean working environment along with an employee training facility. The facility also has employee amenities like a cafeteria, gym, 24/7 in-house medical center and outdoor patios. This plant currently manufactures the four models, Model S, Model X, Model Y and Model 3, and as of 2019 employs around 48,016 people. Between all six facilities Tesla employs around 22,000 employees. Tesla’s goal was to produce an all-electric vehicle for the masses. Initially that did not happen. Tesla unveiled their Roadster in 2006 that came with a price tag of $100,000. That proved not be affordable for the masses. In 2015 Tesla announced the Model 3 which was a more affordable model with a price tag of around $35,000. This new model and lower price made the Tesla brand more accessible to more consumers. Current Tesla owners tend to be male consumers, who are older (45+ years) with higher income($100K+). When the Model 3 was unveiled it brought in a younger demographic (35-44 years), slightly lower income ($50-100K). California has the highest concentration of Tesla owners in the nation with 28% of Tesla consumers being in California. Tesla was founded by Martin Eberhard, CEO and Marc Tarpenning, CFO. The next three employees were Ian Wright, Elon Musk and J.B. Straubel. Martin Eberhard is an engineer who was one of the co-founders of Tesla Motors and CEO until he left in 2008. Before leaving Tesla, a statement was issued explaining that Eberhard had transitioned from board of directors and executive management of the company to the advisory board.

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Marc Tarpenning is an engineer who co-founded Tesla Motors with Eberhard. Tarpenning served as CFO and later Vice President of Electrical Engineering at Tesla until 2008 when he left the company. Ian Wright was the third employee to join Tesla Motors but left just year after joining. Elon Musk was the fourth employee to join Tesla Motors. He jointed Tesla’s board of directors as chairman. Musk lead investments for the company, after Eberhard left the company Musk took over as CEO, a position that he holds today which makes him the longest tenured CEO of an automotive company globally. J.B. Straubel is a businessman, he was the fifth employee. He was the first CTO for Tesla Motors and held that position until his departure in 2019. While he Straubel was at Tesla he was credited with inventing many of the electric core technologies, primarily related to batteries. Today Zachary Kirkhorn is the current CFO joining the company in 2019. Jerome Guillen joined Tesla, Inc in 2010 as Model S program director. Since 2010 Guillen has served as Program Director, Vice President of Worldwide Sales & Service, Vice President of Trucks and Other Programs and is currently the President of Automotive. Andrew Baglino jointed Tesla in 2006 serving in various engineering positions. Since 2019 Baglino services as Senior Vice President of Powertrain and Energy Engineering. Major competitors for Tesla include traditional automotive companies like General Motors, Ford, Honda and Toyota to name a few. Many traditional automotive companies have increased selections of Hybrid (gasoline-electric) vehicles as well as fully electric vehicles. Companies like Kia, Nissan and Volkswagen offer inexpensive options for electric vehicles. Tesla still ranks highest when it comes to high-end electric vehicles over their competitors, even with a lot of brand recognition behind then like Porsche. Some of the most notable strengths attributed to Tesla, Inc are high innovative processes, strong brand recognition and strong control on production processes. Tesla has quickly become 5

known for their high rate of innovation, this included introducing the worlds first fully electric sports car. Aside from the innovations in the automotive world Tesla is now one of the worlds leaders in sustainable energy and now offers products that incorporates solar, storage, and grid services. On June 10, 2010, Tesla, Inc. (TSLA) went public with its initial stock offerings on NASDQ. 13.3 million shares were issued to the public for $17 per share. The initial public offering raised $226 million dollars for Tesla, Inc. Tesla was the first American Automotive company to go public since Ford Motor Company in 1956. The largest shareholder of the Tesla, Inc. is Elon Musk. Elon Musk holds 21.7% of shares beneficially owned stock, which according to the Tesla 2019 proxy statement equaled $38,572,790. After Elon Musk’s 21.7% shares in Tesla, Inc., Baillie Gifford & Co., the second-biggest shareholder of Tesla stock. Baillie Gifford increased its shares in Tesla, Inc. from 7.64% to 7.71% The increase of .07% increased Baillie Gifford & Co., shares to 109,000 shares of Tesla. That equals roughly $32 million worth of shares Tesla faces many Business risks. Tesla cars are expensive. There are government incentives like tax breaks. Tesla Model S costs $75,000 and the Model 3 costs $35,000 before tax incentives and fuel savings. The price of them are steep for a lot of consumers. The cars are costly to produce as well, and it is estimated that Tesla losses $14,000 for each Model 3 it sells. Another business risk is increased competition in electric vehicles. Companies have been announcing their versions of electric vehicles, two of which are Chevrolet and Nissan. Nissan announced the new LEAF which gets 150-226 miles on the battery with an MSRP from $31,000. Something else that is a business risk is that Tesla has a very high capital expenditures and have had a hard time turning a profit. Companies like GM spend three quarters as much in CapEx 6

as Tesla, but they also generate more profits. Tesla has not had a profitable year, and some say that Tesla’s stock is overvalued.

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FINANCIAL ANALYSIS

According to the balance sheet for Tesla, Inc, the cash and cash equivalents for years 2016 through 2018 were similar. In 2019 it nearly doubled. We see a huge increase from 3.4 million in 2015 to $15 million in 2016. Intangible assets were another area that had a large increase. I really can’t tell why the increase has been so large from year one to year two but the increase over the following years did rise, fall then rise again ending with $53.7 million in 2019. Like most of Tesla’s financials there are big rises and then falls. Impairment of assets is when the quality or value of an asset diminishes, with the growth that Tesla is experiencing I don’t feel that this company is in danger of impairment. Total assets for Tesla, Inc. have also increased. In 2015 Tesla started with $57 million in total assets Tesla’s liabilities have increased but not at the rate that its assets have. In 2015 Tesla’s total liabilities equaled $10 million and had a steady climb each year to 2019 $ 19.2 million. Tesla’s stockholder’s equity has also steadily climbed over the past 5 years, starting 2015 at $3.4 million and ending with $6.6 million in 2019. This makes sense due to the growing popularity of the Tesla brand. Balance Sheets

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Income Statements

SOURCES

The following sources were used to derive the conclusions in this report and the ultimate calculation of value: References

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6 big risks of investing in Tesla stock. (2015, October 28). Investopedia. https://www.investopedia.com/articles/markets/102815/biggest-risksinvesting-tesla-stock.asp O'Kane, S. (2020, January 29). Tesla’s record 2019 has bought it some breathing room. The Verge. https://www.theverge.com/2020/1/29/21113987/tesla-q42019-earnings-results-profit-revenue-model-3 Tesla Inc. SWOT analysis & recommendations. (2018, September 12). Panmore Institute. https://panmore.com/tesla-motors-inc-swot-analysisrecommendations Tesla posts $105 million profit for quarter, extending rebound. (2020, January 29). The New York Times - Breaking News, World News & Multimedia. https://www.nytimes.com/2020/01/29/business/tesla-earnings.html (n.d.). Tesla, Inc. https://ir.tesla.com/

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