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Tesla, Inc.BAFI1008 - Business Student ID – SFirm AnalysisReport2021TABLE OF CONTENTS Overview____________________________________________________________ Tesla’s Details__________________________________________________________________ Additional Details_____________________________________________...

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Tesla, Inc. BAFI1008 Business Student ID – S3784490

Firm Analysis Report 2021

TABLE OF CONTENTS Overview____________________________________________________________3 Tesla’s Details__________________________________________________________________3 Additional Details______________________________________________________________3 Financial Summary__________________________________________________4 Cash Flows Overview___________________________________________________________4 Operating Activities__________________________________________________________4 Investing Activities___________________________________________________________4 Financing Activities___________________________________________________________4 Asset Turnover_________________________________________________________________4 Profit Margin, EBIT and EBITDA_________________________________________________4 Bond Analysis_______________________________________________________5 Bond Information and Credit rating_____________________________________________5 Credit Spread__________________________________________________________________5 Bond Price Estimation__________________________________________________________5 Share Analysis_______________________________________________________6 Market Efficiency____________________________________________________7 Cost of Capital_______________________________________________________9 Payout Policy_______________________________________________________10 Share Repurchases____________________________________________________________10 Conclusion_________________________________________________________11 References_________________________________________________________12 Financial Statements__________________________________________________________12 Credit Spreads________________________________________________________________12 Market Efficiency______________________________________________________________12 Share Price___________________________________________________________________12 Cost of Capital________________________________________________________________13 Payout Policy_________________________________________________________________13 Appendicies________________________________________________________14

OVERVIEW Tesla, Inc. develops models, manufactures, and sells electric motor vehicles and designs, manufactures, installs, and sells solar energy generation and energy storage products. Their segments include automotive, and energy generation and storage. Tesla is known to the public as an American electric vehicle giant and a clean energy company based out of California. First established in 2003 by Elon Musk and a group of engineers, Musk has driven Tesla to achieve their mission to accelerate the worlds transition into sustainable energy.

Tesla’s Details Tesla (TSLA) are listed under NASDAQ - GS. They have an outstanding share amount of 963.33M. The Tesla Inc. Bond was issued on the 18th of August 2017 with a volume of 1.8B USD. This bond will mature on the 15th of August in 2025, offering a coupon of 5.3000%. The payment of the coupon will occur twice biannually on Feb 15th. At a current price of $104.136 USD this equal an annual yield of 4.29%.

FINANCIAL SUMMARY Cash Flows Overview

Operating Activities Net Cash seemingly increased by 2.08 billion to net cash provided by operating activities of 1.64 billion during Jan, Feb and Mar 31st, 2021, from net cash used up by operating activities of 440 million also during Jan, Feb and Mar 31st, 2020. This increase was due to the decrease in net operating assets and liabilities of $1.44 billion and the rise in net income excluding non-cash expenses and gains of $747 million, partially offset by $101 million of net gain on digital assets.

Investing Activities Cash flows from investing activities relates directly to capital expenditures, which were $1.35 billion during Jan, Feb, and Mar 31st, 2021. These capital expenditures primarily included the construction of Gigafactory Texas and Gigafactory Berlin and expansion of Gigafactory Shanghai. In addition, $455 million during Jan, Feb, and Mar 31st, 2020, was expended for the Model Y production at the Fremont Factory and Gigafactory Shanghai construction. Digital assets complied 1.23 Billion during Jan, Feb and Mar 31st, 2021, from purchases costing 1.5 Billion and proceeds of the sales of some digital assets amounting 272 million.

Financing Activities Net cash from financing activities amount to 1.02 Billion. This consisted of repayments of convertible senior notes of 1.45 Billion, repayments under warehouse agreements of 294 million, and repayments of solar term loan of 151 million. These outflows were offset by $877 million of borrowings from the Automotive Asset backed notes and an additional offset of 183 million from stock options and issuances.

Asset Turnover The asset turnover ratio is important in deducing the efficiency of Tesla’s assets to generate revenue or sales. Tesla’s Asset Turnover Ratio has reached 0.76 by March 3rd, 2021, which in comparison to their last FY asset turnover which was 0.77. They have decidedly decreased by 0.1% which is not ideal, and they seem to be below the auto industry average of 1.1. Whilst Tesla has remained constant in the turnover of their asset, investor may want to see some more improvement in these ratios and may be a factor for investors to invest.

Profit Margin, EBIT and EBITDA Tesla’s Profit margin is constantly increasing from 2.2 billion in 2017 to 6.6billion in 2020, with an overall TTM of 7.6 billion. Tesla’s ability to grow and dominate in its industry is reflected by their operating profit margin. This is also reflected by their constant increase in expenses from 2017 at 13 billion and in 2020 at 33.7 billion. This indicates that whilst their expense increases

dramatically, their revenue and profit also increase. Tesla’s EBIT is another indicator of their profitability, their EBIT for 2020 was 1.9 billion, a high EBIT means that Tesla’s earnings are stable and will be useful for investors when comparing companies. EBITDA is similar and has increased by over 50% since 2019, suggesting that Tesla has higher earnings, and less operating expenses with more than sufficient revenue left over.

BOND ANALYSIS Bond Information and Credit rating

Credit Spread The credit spread is commonly used to determine the riskiness of corporate bonds, since government issued bonds are generally known to be ‘safe’ or ‘safer’. Hence, the comparison between a corporate bond, a ‘risker’ bond, and a government bond, can illuminate the additional yield required for an investor to take on additional credit risk. The yield of TNX is 1.6% and the yield of TSLA bonds are 4.3%. The difference in the yield of TNX and TSLA bonds reveal the credit spread – 2.7%. A credit spread with 0% difference would reveal that the corporate bond is risk free thus TSLA’s credit spread of 2.7% reveals that the bond is 2.7% more risky than if an investor invested in a government bond with a similar or same timeframe. To gage whether the credit spread is improving, we must look at the historical average of the credit spread, which in this case 2.816%. The current spread is 2.7%, indicating that market conditions are improving, and investors should consider sell their treasuries and purchase TSLA’s bonds, which inadvertently increase capital to TSLA’s bonds and the price of their bonds.

Bond Price Estimation With a Bond Face Value/Par value @$100, an annual coupon rate @5.3000%, yield @4.29%, 3 years till maturity (assuming current year is 2022 instead of 2021), semiannual coupon payments (6 periods). The price of TSLA’s Bond in 2022 is predicted to approximate $102.81, which is $1.33 < the current years bond price - $104.136.

SHARE ANALYSIS Tesla’s stock price within the last three years have seen tremendous growth, their stock price recently reached an all-time high of $900.40 on January 25th, 2021. Since then, Tesla’s stock have seen a decrease by about 30%, which can be seen below from an overview of Tesla’s stock price from 2019 – 2021.

Tesla Stock Price 2019-2021

When we compare tesla’s stock price average over the three years against the overall market, it appears to be downwards starting since the 8th of Jan 2021, propagating that Tesla is starting to fall behind its competitors. Reasons why this may be occurring is because it was around this time that news regarding other auto companies like BMW, General Motors, Volkswagen, and many other EV giants announced their official plan and cost for their luxury EV’s. Another reason could also be due to the huge drop of sales in China, due to a shortage of chips needed by Tesla for some of their high-tech add-ons like auto pilot. Alongside the increase in share price, revenue Tesla’s gross profit mention previously has also increased by 47% from 4,069 billion in 2019 to 7,611 billion in 2021TTM. A drop that can be seen from Feb 2021 onwards, can be related to Tesla’s investment in their Gigafactory in China. China reports that only 11,954 new Tesla vehicles were insured, thus meaning the drop may have been a cause of the drop in

sales, because the Gigafactory in China had not been as profitable as predicted preciously, causing confidence in Tesla investors to decline. Tesla is a non-dividend paying stock and do not anticipate paying cash dividends in the foreseeable future.

MARKET EFFICIENCY Tesla Earning Announcement Event Date: April 26, 2021. A brief overview of Tesla’s financial son the 26th of April reveals the following information. The actual rate of return that Tesla’s shares provided approximates 361.9% within the last year. Their adjusted earnings per share came in higher than expected at $0.93, which is an indicator of Tesla’s profitability. In regard to market efficiency, the underlying question is… Is the market efficient with Tesla’s gains in 2020? despite the global economic uncertainty – The COVID19 pandemic. Tesla’s stock increase eight times in 2020 during the pandemic, whilst most share prices were plummeting for the exception of those entities that benefited from the pandemic – healthcare as an example. The auto mobile industry however from a broad perspective can be expected to decline. It can be asserted that the market was semi- strong efficient with Tesla’s surge in share price. We need to understand, investment returns (EPS) have contain two outcomes – The expected (the best possible outcome given all information) TSLA EPS, $0.93, and the unexpected - any surprises, new technologies, scandals, technological devastation, social media interactions etc TSLA Surprise +17.72% difference . The uncertainty in knowing Tesla’s stock price hike is high, however we can affirm with certainty that realized stock returns accrue to buyers not sellers, and since Tesla issued new shares frequently during 2020 it is unlikely that they would have been expecting their stock price to rise. They were selling their stock and if a large return was to be expected, demand would increase prices, and inadvertently bring returns down to a reasonable level.

Tesla Vehicle It has been founded that Tesla’s car delivered are a key aspect that investors consider when looking into Tesla. According to the graph on the right, Tesla has amounted just under 185,000 units in Jan Feb and Mar 2021, which in comparison to previous quarters,

Number of Tesla vehicles delivered worldwide (units in

add up to more triple what they made in 2018, and double what they made in 2019 and 2020. Despite facing numerous suppling chain management issues, e.g. the chips shortage, they pivoted to new micro controllers whist simultaneously developing new firmware and adopting new suppliers. We can expect vehicle deliveries to grow by and exceed 50% in 2021 and continually grow at 50 over the upcoming years. This graph clearly aligns with the market share price as the increase in no of vehicles delivered in 2020, is larger compared to 2019, and propagates that the market was semi-stroing efficient.

Market Efficiency Findings

According to Eugene Fama, 1970, market efficiency is when the market reflects all available information. Market efficiency can be classified by the efficient market hypothesis (EMH). These three classifications include weak, semi- strong, and strong. The weak form hypothesis avers that future stock prices are derived mainly from historical data sets. The semi-strong, hypothesizes that stock priced reflect all publicly available information and the strong classification suggest that stock prices reflect all information relevant to the firm, inclusive of insider information. Tesla is a prime example that the market is semi-strong efficient, proven through just one tweet from Musk himself almost instantaneously guarantees a stock moving. Whilst it can be easily proved that the market responds quickly to news, we need to know whether the market is moving the right amount. This is difficult to prove as we have to measure the fundamental value of the news or Elon’s tweets as an example and how would you rationally evaluate a social media post? It’s difficult, however analysts have estimated that Tesla’s fundamental value range from $300 - $2500. One special circumstance that may be able to be evaluated are stock splits. Elon announced the 1-5 stock split on the 21 Aug and since then the following 4 days saw a continual increase of 35% ($460.61) per share, adding approximately 85.8 Billion in market value. This means that either the stock was severely understated prior to the split, or the split is overpriced as it cannot be rationally priced at both dates, thus suggesting a semi-strong market.

Modelling the Market

Share Value TSLA at @28th April 2021

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COST OF CAPITAL The estimated Cost of Capital can be predicted. We can use book values or market values to calculate the cost of capital. We will use market values as they are more relevant and represent a more current valuation of debt and equity. The use of the Working Average Cost of Capital (WACC) formula will be used to estimate how much it costs Tesla to raise capital for itself. The formula is given on the right and the calculation below: Market Values Weight of Debt (D%) =Wd Value of debt / Total firm value (V)

Weight of Equity (E%) - Ve

Value of debt Total Firm Value Wd %

$ $

125,100,000,000.00 355,300,000,000.00 0.35209682 35.21%

Value of Equity Total Firm Value Ve %

$ $

230,200,000,000.00 355,300,000,000.00 0.64790318 64.79%

Rd = 5.3655%, Wd = 35.21% Re (cost of equity) = 13.4%, Ve = 64.79% Wp = 0million Tax rate = 4.38% No dividends (n/a preference shares or ordinary shares)

WACC = (.6479 * 13.4%) + (0.3521 * 5.3655%) * (1 – 4.38%) = 10.4883% = 10.49% Since a company is generally financed by its debts and equities, Tesla’s WACC of 10.49%, we can determine that Tesla is expected pay on average to finance its assets. We can use Tesla’s ROIC of 5.66% as a comparison factor to determine that Tesla is earning more returns that are unmatched with its rise in capital. Since Tesla’s is earning returns that do not match up to their cost of capital, we may see a deduction in value of Tesla as the company continues to grow.

PAYOUT POLICY Share Repurchases Since Tesla is a non-divided paying stock, and thus no dividend smoothing is engaged, their earnings are reinvested back into themselves. For the year 2018, they reinvested 5.318M, in 2019, they reinvested 6.083M – a 14.39% increase since 2018. In 2020, they reinvested 5.399M – a 11.24% decline from 2019, and in the quarter ending Mar 21 they reinvested 4.75M, a 22.18% decline since 2020. These figures from 2018 - 2021 can be graphed using quarterly figures as depicted on the right. These retained earnings by Tesla, can indicate their ability to utilize profits over time. (All above figures are sourced from the balance sheet of Tesla under total liabilities – “Retained earnings – (Accumulated Deficits)” Whilst there is a 22.18% decline in 2021, it should be noted that the year has not ended, and we can assume an increase by around 5 billion as Tesla plans to invest in China’s Gigafactory as soon as the trade war between the U.S and China settle down. We can assume an additional 5 billion investments into the Gigafactory as Bloomberg intelligence analysts suggest the Gigafactory could require an investment around 10 billion.

CONCLUSION Tesla considered a growth investment and would recommend that investor fitting the profile to invest with them. However, income investors would highly recommend staying away from Tesla as it is a non-dividend company and reinvest back into itself. Investing in their bonds, are a safe investment, and would fit a low-profile risk investor or a high-risk investor looking to diversify. This is evident through their 2.7% risk comparison to a government bond. Tesla’s shares are predicted to rise further, based on news about expansion into European regions, Tesla’s upcoming Gigafactory in China, their goal to increase production dramatically through these factories as well as historical information on the amount of Tesla vehicles being delivered worldwide, with prediction to more than double in the coming years. Whilst Tesla does not pay out dividends, it was all part of Musk’s strategic business plan and alleviate many business stressors, the most prominent being keeping shareholder satisfied with the amount of dividends. Tesla’s share price is more than enough to keep shareholders satisfied, especially Musk’s announcement to split shares 1-5.

REFERENCES Financial Statements 

https://yahoo.brand.edgar-online.com/DisplayFiling.aspx? TabIndex=2&dcn=0000950170-21-000046&nav=1&src=Yahoo

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https://finance.yahoo.com/quote/TSLA/financials/

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https://www.investopedia.com/articles/active-trading/082015/key-financialratios-analyze-automotive-industry.asp

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https://yahoo.brand.edgar-online.com/displayfilinginfo.aspx? FilingID=14899123-32417233017&type=sect&TabIndex=2&dcn=0000950170-21000046&nav=1&src=Yahoo

Credit Spreads 

Credit Spread - Overview, How to Calculate, Example (corporatefinanceinstitute.com)

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Credit Spread (Meaning, Formula) | How to Calculate Credit Spread Risk? (wallstreetmojo.com) Bonds Center - Bonds quotes, news, screeners and educational information - Yahoo Finance

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https://www.bondsupermart.com/bsm/bond-factsheet/USU8810LAA18

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How to Compare the Yields of Different Bonds (investopedia.com)

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Corporate Bonds: An Introduction to Credit Risk (investopedia.com)

Market Efficiency 

Tesla Stock Forecast & Price Prediction for 2021, 2022-2025, and Beyond | LiteForex

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• Tesla deliveries by quarter 2020 | Statista

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Tesla Earnings: What to Look for from TSLA (investopedia.co...