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.
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).
