Following a plant tour to TSLA, Goldman is confident that the company will meet its 2014 production objectives. However, what keeps them more guarded is the aggressive timetable of the gigafactory as well as a potential escalation of capital needs given the planned capacity ramp, model and derivative expansion, service expansion as well as other undisclosed projects. Simply put, Goldman warns, at the low end of our three disruptive scenarios for TSLA, they see the need for an additional $6bn in capital - and 18% dilution to the current market cap around $33bn. With 3Q likely to be a noisy quarter and shares seemingly baking in flawless execution at present, Goldman remains sidelined for now with a $210 target.
Via Goldman Sachs,
What's changed
We hosted a visit to TSLA’s Fremont, CA facility and met with the CFO.
Key takeaways:
(1) Production ramp post launch of new line is proceeding according to plan. Production is back to 800+ units a week (similar to before the shutdown); TSLA expects a rate of over 1,000 by year end.
(2) The body shop is the next bottleneck, with max capacity of 1,500 a week; a significantly larger body shop is planned for 1H15.
(3) Post the shutdown, wait times have extended: China at >5 months, and anecdotes of over 3 months in the US. Cancelations are not elevated relative to history, however.
(4) TSLA believes it could self-fund capex but is keeping funding options open depending on the pace of growth and new products it wants to undertake in the future.
(5) Biggest near-term cash calls are the body shop and paint shop upgrades, Model X preproduction and launch costs, to be followed by the gigafactory and Model 3.
(6) Gigafactory will ramp in phases, with localization increasing over time; Nevada site selection allows TSLA to meet its timing, not accelerate the process.
Implications
On balance, the plant tour was positive with Tesla on track to meet its 2014 production objectives. What keeps us more guarded is the aggressive timetable of the gigafactory as well as a potential escalation of capital needs given the planned capacity ramp, model and derivative expansion, service expansion as well as other undisclosed projects. So with 3Q likely to be a noisy quarter and shares seemingly baking in flawless execution at present, we remain sidelined for now.
Valuation
Our 6-month price target – derived from five probability-weighted automotive scenarios plus stationary storage optionality – remains $210.
Key risks
Cadence of North America/Europe/China demand, gigafactory timing, Model X launch, and downward revisions to estimates.
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No pull back in spending expected
With numerous projects laid out (as well as those not currently communicated) ahead for TSLA, we see a possible need for additional capital.
In the near term (end of 2014 through 2015) projects include upgrading the paint and body shops for Model S and Model X, continued Model X development/launch spending, and initial gigafactory costs. Into 2016, spending for the gigafactory accelerates and Model 3 spending begins. Beyond that, there will be incremental follow through capital deployment related to the Model 3 and gigafactory. TSLA management has noted that the company could self-fund these amounts but would consider external funding depending on its growth cadence and other projects it takes on.
For example, at the low end of our three disruptive scenarios for TSLA, we see the need for an additional $6bn in capital.
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We value Tesla in Exhibit 1 by modeling three “disruptive” automotive upside cases, in addition to our automotive base and downside cases, through 2025 and by incorporating the option value from stationary storage.
- Our base case forecast calls for 290k units by 2020, somewhat below Tesla’s 500k assumption, with volumes growing to 760k by 2025 and remains relatively unchanged.
- Our downside case remains unchanged at projected volumes of 260k by 2020 with Tesla ultimately reaching 500k volumes in 2025.
- For our three “disruptive” cases, we draw on the experience of past technologies like the iPhone, the Ford Model-T, and selected consumer durables like refrigerators/ laundry appliances/ dishwashers – all of which were widely adopted new technologies that radically revolutionized consumption patterns – in order to generate potential volume paths out to 2025 that show significant upside to our base and downside cases.
When probability weighted (25% disruptive scenarios, 50% base case, and 25% downside case), our automotive valuation implies a price of $190. On top of this we add our $20 grid storage option value, which is derived by evaluating potential earnings from our projected stationary storage opportunity from 2018 through 2020. The total implied value from this methodology comes to $210, implying 20% downside.
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It appears shareholders are nervous...
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