Investing in Tesla A Good Idea Research Paper

Pages: 11 (3101 words)  ·  Bibliography Sources: 14  ·  File: .docx  ·  Level: Master's  ·  Topic: Business  ·  Written: July 15, 2018

Investors expect Tesla to have to go looking for more capital by the end of the year.

Operating Efficiency

Tesla has income per employee of -52,244 on revenue/employee of 313,208—meaning that Tesla loses money on production. Its enterprise EBITDA is -36,279.01 (Tesla Financials, 2018). With the erection of an end-of-line open-air tent structure in the middle of the desert in order to meet a self-imposed, arbitrary production deadline of 5000 Model 3’s, Tesla has raised more than a few eyebrows with regard to its operating efficiency. In its 10-Q, Tesla acknowledged its own efficiency issues: “We have no experience to date in manufacturing vehicles at the high volumes that we anticipate for Model 3, and to be successful, we will need to complete the implementation and ramp of efficient and cost-effective manufacturing capabilities, processes and supply chains necessary to support such volumes” (Tesla Form 10-Q, 2018, p. 44). A number of critical assumptions underlie its forward looking progress and goals:

· that we will be able to complete ramping high volume production of Model 3 at the Tesla Factory without exceeding our projected costs and on our projected timeline

· that we will be able to continue to expand Gigafactory 1 in a timely manner to produce high volumes of quality lithium-ion cells to be integrated into battery modules and finished battery packs and drive unit components for Model 3, all at costs that allow us to sell Model 3 at our target gross marginsBuy full Download Microsoft Word File paper
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· that the equipment and processes which we have selected for Model 3 production will be able to accurately manufacture high volumes of Model 3 vehicles within specified design tolerances and with high quality

· that we will be able to maintain suppliers for the necessary components on terms and conditions that are acceptable to us and that we will be able to obtain high-quality components on a timely basis and in the necessary quantities to support high-volume production; and

· that we will be able to attract, recruit, hire, train and retain skilled employees to operate our planned high volume production facilities to support Model 3, including at the Tesla Factory and Gigafactory 1 (Tesla Form 10-Q, 2018, p. 44-45).

Research Paper on Investing in Tesla A Good Idea Assignment

Tesla then goes on to note that “if one or more of the foregoing assumptions turns out to be incorrect, our ability to meet our Model 3 projections on time and at volumes and prices that are profitable, demand for and deliveries of Model 3, as well as our business, prospects, operating results and financial condition, may be materially and adversely impacted” (Tesla Form 10-Q, 2018, p. 45). With so much riding on production of the Model 3 in order to go from being a niche market player to a mainstream manufacturer of an affordable EV for the middle classes and thereby achieve its mission of bringing sustainability to the 21st century for the average commuter, Tesla’s operating outlook is based on a number of highly unlikely assumptions—namely:

· That the company will be able to sustain 5000 Model 3’s a week: it cannot, based on the number of hoops it had to jump through just to meet this goal;

· That expansion is even in the cards considering the cash burn it has gone through;

· That the company will be able to retain skilled workers: an extraordinarily high rate of turnover, especially among executives at top levels of the company, has been well documented (Hull, 2018).

Tesla, in other words, is not likely to overcome its poor operating efficiency anytime soon.

Capital Structure

Tesla’s capital structure based on ratio analysis begins with its debt to equity ratio, which at the end of 2017 stood at 2.5%—lower than industry standards but only because Tesla’s stock is overvalued with a forward P/E of approximately 150, which puts the company at 6x the average P/E of the Nasdaq. TSLA, in short, has an inflated stock price that is the result of a fan-following based on CEO Musk’s personality, promises, and appeal.

The market cap shows that TSLA is absurdly priced. For a company that has no net profits yet, its value of 49 billion USD makes no sense. Such a market cap should be applied to a company that is actually company of making a profit in the relative ballpark of that figure. Tesla is not only nowhere near making that kind of profit—it actually has yet to make any profit. Its momentum in the stock market has been fueled by speculation and what can only be described as a bubble in the tech sector. This is the sign of a cult stock that will soon have the air let out of its tires.

Its total debt to total equity is 286.29. Its long-term debt to equity is 263.19. Its long-term debt to total capital is 68.13. Its long-term debt to assets is 0.39. Capital expenditures were negative 4 billion in 2017 and the five year trend shows a worsening capital and cash flow year over year (Tesla Financials, 2018).

Tesla’s total debt as of March 2018 is 12.57 billion USD. Its total liabilities are nearly double that at 21.55 billion USD. Its free cash flow is -4.14 billion USD for 2017.


Tesla has a gross margin of +19.15 with an operating margin of -13.93 and a pretax margin of -18.79. Its net margin is -16.68. Its return on assets is -7.64 and its return on equity is even worse at -43.63. Its return on total capital is -13.20 and its return on invested capital is -14.25 (Tesla Financials, 2018). In short, Tesla is not profitable and has been a loser for investors in all ways (other than for stockholders).

Compared to Ford, which is positive in terms of profitability with a +4.85 net margin, Tesla is a company that does not bode well for investors—and yet its stock is an investor’s dream (at least for some). There is no indication whatsoever that Tesla will be profitable in the short or long term future as Spiegel (2018) points out. Spiegel (2018) notes that the Model 3, which is essentially what the company is hanging its future hopes on, “would cost Tesla at least mid-$40,000s to build,so it can either sell them at a gigantic loss starting @ $35,000 or–as it’s doing now @ $49,000–mandate a larger battery plus other options and thus price them into a much smaller market segment.” Moreover, orders and reservations for the Model 3 are dropping substantially as production halts and missed deadlines as well as headlines regarding safety issues about Tesla cars in general stoke consumer fears (Spiegel, 2018). From the macro-perspective, Tesla is not going to be profitable—ever.

Recommendations for Future Analysis

Future analysis should use trend analysis in order to identify whether Tesla is making headway in reversing its current trajectory. Macro-analysis should also be used as the market will be absorbing a multitude of new EVs from a variety of other manufactures. Trend analysis will help analysts to examine a financial statement and see changes from one statement to the next in order to evaluate the overall trend of the company in terms of growing net margins or seeing a further collapse in capital structure, as is likely to be Tesla’s case in the coming years.

Macro-analysis would allow analysts to take a look at the bigger picture and the external variables impacting the company and how these factors would weigh on the company’s financials in the years to come. A look at the global economy, the industry, what competitors are doing in the field of EVs, and what sort of following or interest their vehicles are having on consumers would all weigh on the value that an analyst might assign to the company. Likewise, monitoring the headlines regarding Tesla’s consumer safety ratings would be worth noting from this perspective.


About Tesla. (2017). Tesla’s mission. Retrieved from

Bloomberg. (2018). Hidden by model 3 mess, Tesla’s debt problem is about to emerge.

Retrieved from

Denning, L. (2018). What does $3 billion even buy Tesla these days? Retrieved from

Durden, T. (2018). Tesla admits it may need more capital. Retrieved from

Evans, M. (2017). What is environmental sustainability? Retrieved from

Higgins, T. (2018). Tesla misses model 3 production goal but shows progress. Retrieved


Hull, D. (2018). Tesla’s executive churn toughens test of Musk’s management chops.

Retrieved from

Morris, D. (2018). Tesla starts fulfilling model 3 orders. Retrieved from

Smith, M. (2018). Tesla bonds are in free fall. Retrieved from

Spiegel, M. (2018). Tesla is still a zero. Retrieved from

Tesla. (2013). Mission statement. Retrieved from

Tesla Form 10-Q. (2018). Retrieved from

Tesla Financials. (2018). Retrieved from

Trefis, T. (2018). Why Tesla is… [END OF PREVIEW] . . . READ MORE

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