Tesla Gives Strong Production and Margin Guidance
Author: John Moschella CFA, CPA Published: February 10, 2016 at 7:00pm Category: Earnings Review
We have updated our Tesla (NASDAQ:TSLA) Earnings & Valuation Model to include today’s results. The following is a summary of the new guidance management gave on tonight’s call and the key changes we made to our earnings model. Keep in mind, we try to keep the assumptions in our models constant, and change only the line items where management has given specific guidance; However, Tesla's results change rapidly so there is greater variation in this model compared to the other companies we cover.
Summary of Earnings Model Adjustments
We have incorporated the guidance above into our earnings model. Here are some of the key items we considered in our updates:
1) Average Selling Price: Based on today’s results it appears our Average Selling Price (ASP) estimates ahead of the release were a bit too high. Management did not disclose the 4Q15 ASP for the Model S and X; However, this metric is important for our future period forecasts so we attempted to estimate the ASP based on the following:
2) Gross Margin: Management guided Model S margin to approach 30% by the end of 2016 and Model X to be about 25%. On the call they said they hope to exceed 30% gross margin on both vehicles within 18 months. In our earnings model we assumed both Model X and Model S reach 30% gross margin by the end of 2018. We also assumed that it would take some time for the year-end 2016 target to be reflected in the full quarter results.
3) Operating Expenses: R&D was slightly lower than we expected, so we decreased R&D as a percentage of revenue in 1Q16, and reduced it over time in 2016. SG&A was slightly higher than we expected so we increased it slightly in 1Q16. Throughout 2016 we increased total opex and capped the year over year growth at 20% consistent with management’s guidance.
Management’s New Guidance
EPS & Valuation Including Tonight’s Results
Our Tesla model is a Tier 1 model, so we value shares using two approaches: 1) a market multiple approach, and 2) a Discounted Cash Flow (DCF) valuation, and then weight each by 50%.
Based on the assumptions above, our full year 2016 non-GAAP diluted EPS estimate increased from $1.54 to $1.90, and net debt per share increased to $10.84. Our market multiple valuation, using a 2016 Price-Earnings (PE) ratio of 99x excluding the value of net debt, increased from $148 to $177 (19 x $1.90 - $10.84). Our DCF valuation increased from $162 to $173 based on a Beta, Equity Risk Premium (ERP), WACC, and terminal growth rate of 1.25, 5.1%, 7.6%, and 2% respectively.
Our 12-month price target based on a 50%/50% weighting of our market multiple/DCF valuation increased from $155 to $175. Our multiple and primary DCF inputs were held constant after the company’s release to isolate the impact of price movements from earnings results only. To see the details of our estimates or to plug in your own assumptions please download our model below.
Sources: Company reports, SEC filings, and investor presentations.
Summary of Earnings Model Adjustments
We have incorporated the guidance above into our earnings model. Here are some of the key items we considered in our updates:
1) Average Selling Price: Based on today’s results it appears our Average Selling Price (ASP) estimates ahead of the release were a bit too high. Management did not disclose the 4Q15 ASP for the Model S and X; However, this metric is important for our future period forecasts so we attempted to estimate the ASP based on the following:
- The shareholder letter stated that the ASP for Model S declined about 2%. Assuming the Model X contribution was minimal in 3Q15 and around $110k per unit in that quarter would result in a Model S ASP of $96.5k in 3Q15. A 2% decline from this level equals an ASP of approximately $93.6k in 4Q15.
- From there we were able to estimate the Model X ASP, using the revenue from the Model S, Service & Other Revenue of $97M, and Model X deliveries to arrive at 4Q15 Model X ASP of $120k.
- Based on these calculations we brought our vehicle ASP down from our prior 2016 estimate to reflect the decline in 4Q15; However, we kept the final full year ASP in-line with management’s guidance of a slight increase.
2) Gross Margin: Management guided Model S margin to approach 30% by the end of 2016 and Model X to be about 25%. On the call they said they hope to exceed 30% gross margin on both vehicles within 18 months. In our earnings model we assumed both Model X and Model S reach 30% gross margin by the end of 2018. We also assumed that it would take some time for the year-end 2016 target to be reflected in the full quarter results.
3) Operating Expenses: R&D was slightly lower than we expected, so we decreased R&D as a percentage of revenue in 1Q16, and reduced it over time in 2016. SG&A was slightly higher than we expected so we increased it slightly in 1Q16. Throughout 2016 we increased total opex and capped the year over year growth at 20% consistent with management’s guidance.
Management’s New Guidance
- 1Q16 deliveries are expected to reach 16,000 vehicles. Full year 2016 deliveries are forecasted to be between 80,000 and 90,000 vehicles. The breakdown between Model S and X was not given; However, management expects the share of Model X deliveries to increase throughout the year.
- Average vehicle transaction price is expected to increase slightly during 2016.
- The percentage of cars leased is expected to remain constant with 3Q15.
- By the end of 2016 the gross margin for Model S should “approach” 30%, and Model X should be “about” 25%.
- First quarter operating expenses are expected to increase “just slightly”. Full year 2016 operating expenses are expected to grow by 20% year over year.
- Capex is expected to be $1.5B, primarily related to Model 3 and the Gigafactory.
- Management does not expect to have to raise outside funding to meet the 2016 capex needs.
EPS & Valuation Including Tonight’s Results
Our Tesla model is a Tier 1 model, so we value shares using two approaches: 1) a market multiple approach, and 2) a Discounted Cash Flow (DCF) valuation, and then weight each by 50%.
Based on the assumptions above, our full year 2016 non-GAAP diluted EPS estimate increased from $1.54 to $1.90, and net debt per share increased to $10.84. Our market multiple valuation, using a 2016 Price-Earnings (PE) ratio of 99x excluding the value of net debt, increased from $148 to $177 (19 x $1.90 - $10.84). Our DCF valuation increased from $162 to $173 based on a Beta, Equity Risk Premium (ERP), WACC, and terminal growth rate of 1.25, 5.1%, 7.6%, and 2% respectively.
Our 12-month price target based on a 50%/50% weighting of our market multiple/DCF valuation increased from $155 to $175. Our multiple and primary DCF inputs were held constant after the company’s release to isolate the impact of price movements from earnings results only. To see the details of our estimates or to plug in your own assumptions please download our model below.
Sources: Company reports, SEC filings, and investor presentations.
