“I don`t think there is intense emotion for an any inventor to view its creation working. That excitement makes you forget to eat, sleep, everything.” These are words of croat Nikola Tesla (1856-1943), inventor, physicist, mechanical engineer, electrical and futuristic. Futurism was precisely the word that Elon Musk stayed in love with the vision of Nikola Tesla, a futuristic dreamer sometimes. Elon followed his words like model of inspiration and began to follow its personal dreams creating a world revolution with a great future ahead.
As along the story, new technologies appear and revolutions the world in good times, when the economic situation allows the world’s population to known that new technologies improve living standards. The company that i’m currently studying is one such example, Tesla Motors, reference worldwide in the new global market of the electric vehicles.
Born in the technological region, Silicon Valley, the company was founded by Elon Musk (creator also of other projects like Solarcity, Paypal or SpaceX) in 2003 after been interested in the industry.
The company announced at first marked by a milestone to date with the incursion in the market for its Tesla Roadster sports car, the first all-electric sport car worldwide launched in 2008.
The year 2010 was chosen to start trading on the financial markets. Since then these shares had an appreciation of 76%, or whatever it is, the company was worth in 2010 about 2 billions (now 3.55 billion dollars).
Although everything is good for the company today for his contribution to the environment, there are still many unknowns to clear and analyze the challenges that the company may face in the coming years. Leaving the possible competition, my biggest concern is about the current economic situation.
And we can ask ourselves, what this mean for Tesla? Lot. We can’t forget that the company was founded on two solid principles:
-Economy expansive in its foundation: The economy is self-powered, and when it grows also boosts trade, consumer cyclical products …. the market demands more and more the better the overall economic situation. Today, in global crisis and the credit restrictions that could affect to some extent to the total demand for Tesla Motors in the medium term.
-Oil prices too high: When the company was founded in 2003, the world economy was in a continuous period of growth, being expected at the time that the global economy continue this pace, and therefore more costly the price of oil (looking for new sources of alternative energy).
These two aspects could have no importance historically, due that the economy has two main cycles (expansive and recessive as “clean process” of the first). Right, this is the reality if we look at a graph of global GDP in recent decades. But the problem for the automobile company that is like any other company in the industry (GM and Ford for example), it takes a lot of credit flow for the company to operate properly, and though Elon Musk could provide personally more millions to the company, maybe can be insufficient, forcing the company to seek financial credit outside the auto group. We know that financial institutions can not afford to wait for the business cycle expansion, making the debt could overcome and forcing company to meet its obligations with these creditors.
Looks like the company will not have problems in sales targets due the notes made public that affirms that the group has sold a large amount of each new modelst, but we know that the market is capricious, and Tesla like any other capitalist company is exposed to the risks of supply and demand (more belonging to a cyclical industry like the automotive).
The distribution model of the company is exclusively for their own sales. Although the group hopes to be opening new dealers annually. Today the group has an extensive global network of dealers (22 dealers in U.S., 13 in Europe, 3 in Asia / Pacific and 1 in Canada).
Referring to the sales, the company has signed today an agreement with the California commercial bank Wells Fargo & Company in which the bank will finance sales of Tesla’s models, relaxing concerns about future sales of the group (show in the following charts net income and EPS previsions).
The company produces models in the group’s factory in Fremont, California. In 2010, Tesla Motors bought this factory (closed the previous year by GM and Toyota) for about 42 million dollars to start his solo production and gain efficiency from the production first step to final sale.
Yesterday Tesla Motors Inc. began delivering the Model S (fully built in Fremont factory) as we see in the image below.
It was the first model launched by the group in 2008. Manufactured between California and England, was the first 100% electric global sport car, with great social impact and have to be withdrawn in the current year because the company has decided to focus on accessible and broader segments to the average customer. Its price is based on the 109.000 U.S. dollars. Among the nearly 2300 models were sold in this series include the names of famous personalities such as Leonardo DiCaprio, who declined to give his support to the firm from the beginning.
The second model, offered for sale in 2011 and delivered to the first owners this week. This is a car manufactured in Fremont factory, with excellent acceptance among critics of the automobile world. With a strong sport line, the model is sold from a base price of 57.400 U.S. dollars. The second car of the brand currently have more than 10,000 orders, being more affordable and targeted for medium public.
Third model in the company’s history. Although it is expected that this crossover SUV was manufactured entirely in the factory in Fremont arrives to the market in 2014, the fact is that orders today yet reach the 40 million dollars. It is expected that the model is able to meet expectations and compete with brands like Audi, Porsche or BMW among others.
Apart from their own models, Tesla Motors is a pioneer developing new technologies for the automotive industry. This has helped the group to develop technology (especially batteries) for recognized manufacturers in the automotive industry (for example Daimler Smart, Mercedes Benz A-Class orToyota RAV4 among others).
It’s sometimes said that if the draft Tesla Motors as a manufacturer of automobiles fail (personally I doubt it), the group could survive in the industry as batteries auxiliar (because high quality of this product series) and other parts for major manufacturers in the automotive industry.
The company has said that the purpose is to sale new models more accessible to the average customer, creating lower-priced small cars and therefore, achieving this target over the years by the California company.
Personally I think that is the most successful strategy that the group can take, because as I mentioned before we talk about an industry that is highly necessary to have a lot of cash flow almost daily (though the group is expected to produce large net cash from 2015 as we can see in the following charts of total debt-cash and debt-cash per share chart) for the endless number of suppliers, payments to employees, production line with little production cuts ….
Against this analysis, and the expected good sales numbers, I personally recommend buying shares of Tesla Motors Inc. with price target of $ 80 (upside of 137% from the current prices) for the mid-long term. This price is justified if the company is able to meet deadlines (due to their relative inexperience in mass production) and continue releasing new models with great success, as has happened so far.
-Prices in article are represented in U.S. dollars (USD).
-When the article is published Tesla Motors Inc. was trading at 33.78$ (USD).
-The future price estimations are made at P/E of 10 times (10x), considering that this average is successful for this business.
-Article and all charts are created and developed respectively by Juan Oribe.
-The pictures are from Tesla corporate website.