Stifel analysts James J. Albertine and Lucy Webster take a close look at Tesla with a focus on the recent flurry of activity related to its gigafactory.
Gigafactory puts a lot on the plate
Tesla Motors Inc (NASDAQ:TSLA) announced formal plans to construct a $4-5 bn “Gigafactory” (of which TSLA plans to contribute $2 bn), expected to support production of roughly 500k units by 2020. TSLA plans to build the facility in three years and expects to hire 6,500 additional employees (we note 5,859 full-time employees at YE 2013). In conjunction, TSLA also announced a $1.6 bn convertible senior notes offering, the proceeds of which will be designated for Gigafactory construction, cost of convertible note hedge transactions, the development and production of a “Gen III” mass market vehicle, and for general corporate purposes.
Reputed short-seller Spruce Point Capital Management released its latest short report this week. The firm is shorting Canadian dairy and grocery manufacturer Saputo. Spruce Point chief Ben Axler believes the company is entering a phase of declining growth and highlights the financial stress and growing challenges he sees it facing, not only in Canada but Read More
Thoughts: Tesla Motors Inc (NASDAQ:TSLA) has a lot on its plate, and with limited transparency into management’s detailed long-term outlook it remains difficult to unravel what exactly is being discounted into the current stock price. We think the energy storage opportunity trumps the vehicle opportunity for three reasons: (1) fewer customers to convince and service, (2) less risk to the supply chain – can in-source virtually all battery pack production while vehicle assembly still requires significant external support, and (3) U.S. demand for a renewable energy solution alone may be enough to support a Giga-sized investment before addressing international opportunities. Relying on vehicle sales alone will require Tesla Motors Inc (NASDAQ:TSLA) to quickly build-out international assembly, distribution, and service, which carries significant ongoing costs and undue risks for a growing manufacturer, in our view. We will endeavor over time to enlist peers and industry consultants to assist in a deeper dive scenario analysis as it relates to Tesla Motors Inc (NASDAQ:TSLA)’s financial potential in the energy storage industry.
What does this mean for Tesla’s stock price?
Valuation Discussion: We assume Tesla Motors Inc (NASDAQ:TSLA) could achieve annual unit sales of 300k by 2020, or 60% of its stated goal, which would imply close to 1 mm Tesla Motors Inc (NASDAQ:TSLA) vehicles on roads globally by the end of the decade. We believe Tesla Motors Inc (NASDAQ:TSLA) could earn roughly $11.75 per share in 2020, which would imply a $133-$171 per share value today at 25x EPS discounted back at a 8-12%. Bear in mind U.S. luxury car sales recently peaked at 1.15 mm in 2006 with BMW accounting for 231k, Lexus 200k, and Mercedes-Benz 179k units, still implying a substantial Tesla Motors Inc (NASDAQ:TSLA) market share gain (roughly 50% of 2020 global Battery EV production per LMC Automotive estimates).