T Deal Flashcards
Tesla Deal Summary
Barclays was an active joint bookrunner with third highest economics on the deal. The stock traded UP during the first day and closed at ~+5% ($804). Ultimately priced in line with where it launched at $767. All primary shares.
The best part about that deal was that I was essentially running it single handedly. Vice president who was staffed on the deal with me was about to leave the company and was not actively involved. Therefore, I was leading all of the due diligence and committee calls.
The company decided to go with opportunistic stock issuance to raise capital. The stock was up almost 160% compared to a year ago so the timing was perfect and while some critics were saying that Tesla uses the run-up to sell more stock at elevated prices – the offering priced in line with the market price and stock traded up during marketing day. The stock is almost doubled the price since then so probably was good investment back then.
Due Diligence with the company -> internal underwriting committee -> preparing sales people -> day of marketing -> pricing and close
Tesla Company Overview
Tesla designs, manufactures and sells clean energy products and operates through two segments automotive and energy generation and storage. Tesla currently produces and sells three fully electric vehicles, the Model S sedan, the Model X Sport Utility Vehicle (SUV) and the Model 3 sedan. Tesla started production of Model Y in early February 2020 and first deliveries are expected by the end of the first quarter 2020.
Tesla leverages its technology expertise in batteries, power electronics, and integrated systems to manufacture and sell energy storage products. In late 2016, Tesla began production and deliveries of the Powerwall 2 and Powerpack 2 energy storage products. Through its acquisition of SolarCity Corporation, which closed on November 21, 2016, Tesla also sells and leases solar systems (with or without accompanying energy storage systems) to residential and commercial customers.
Tesla High Level Financials
2020 Revenue ~30bn (90% coming from automotive) growing at ~20% with growth in production capacity (relieving production constraints on demand)
GM 18% improving as production ramps up and scale achieved, costs of batteries going down, ASP increasing for new models with more manufacturing efficiencies
OM 3-7% improving due to high operating leverage and as efficiency of operations grows
EBITDA margin 12-16% - high capex due to build out of factories
Turned profitable on GAAP Net Income basis in 2019 and expected to remain so
Tesla Investment Highlights
• EV market worldwide is ~$160bn, projected to grow at ~20% CAGR through 2040
• Electric Vehicle market leadership with more than 70% of the US BEV market
• Huge product success with 64% growth in sales 2015-2019
• Historically unmatched product characteristics and technological leadership (highest range of driving than any of the competitors over the years; lowest price per mile of range)
• Strong Growth outlook:
o Full year 2020 vehicle deliveries are expected to comfortably exceed 500,000 units
o Huge backlog and capacity constrained output – with build out of new factories in China and Germany production capacity will start catching up with demand, current period is capacity expansion period and TSLA proved that it has the talent to do it
o Both solar and energy storage deployments are expected to grow at least 50% in 2020
• Numerous growth opportunities
o Growing & differentiated product portfolio and product investments in cybertruck, roadster, multipurpose vehicle, SW models for autonomous driving etc
o Opportunity to enter new markets through Semi truck
o International expansion opportunity is huge
• Strong industry fundamentals – growth of green energy; production costs are falling for lithium-ion batteries; favorable regulations; substitution of gas vehicles with BEV; residential solar market growth
• Turning point in 2019:
o Turned positive on GAAP net income basis and expected to continue remain so
o Positive FCF (EBITDA-Capex) turned positive and expected to remain positive with possible temporary exceptions, particularly around the launch and ramp of new products
• Gradually decreasing leverage assuming convertible debt gets converted at the current price
Tesla Investment Risks
- Competitive response from large established OEMs. The biggest risk for TSLA that ended up not being realized – tesla had 2-3 years
- Highly leveraged entity with high capex. Leverage has been going down with time and additional inflow from equity raise will solve almost all liquidity issues
- Chinese factory closure due to corona virus Escalation caused Tesla to temporary close its Chinese factory. However, at the time of the issuance they already reopened it.
- Supply chain interruptions caused by COVID-19. Had significant inventory of needed parts (enough for 5 weeks) and were ready to deliver over the air the parts that were in critical quantity.
- Phase out of government incentives in 2019. With certain pull forward clearly visible in sales in 2018, the demand still remains strong throughout US and other geographies.
- Drop in oil prices could affect demand. Growing concerns about environmental pollution and demand for green and technology-advanced autonomous vehicles tend to overweight pressures from decreasing cost of ownership of a gas car.
Tesla Market Overview
EV market worldwide is ~$160bn, projected to grow at ~20% CAGR through 2040. Strong market fundamentals – growth of green energy; production costs are falling for lithium-ion batteries; favorable regulations; substitution of gas vehicles with BEV; residential solar market growth at 18% 2017-2021. Competition is substantial but falling behind TSLA in technology aspect and brand strength.
Tesla Valuation
Our valuation was based on trading comps in several categories: major focus was on disruptive, high growth tech: Alphabet, Amazon, Apple, Netflix, Nvidia (av EV/Rev = 5-10x, av EV/EBITDA = 19-30x) and OEMs: BMW, Daimler, Nissan, Toyota (av EV/Rev = 3-4x, av EV/EBITDA = 14x). Tesla was trading at 5.4x EV/Rev so somewhere in the middle between tech and OEM and 37x EBITDA but we think that TSLA still should trade based on Rev as it’s still growing with high EBITDA margin expansion potential so in line with the market
