Tesla’s 2016 Estimates Will Take Center Stage Tonight
Author: John Moschella CFA, CPA Published: February 10, 2016 at 7:00pm Category: Earnings Preview
We have calibrated our Tesla (NASDAQ:TSLA) Earnings & Valuation Model to meet consensus estimates in preparation for tonight’s earnings release. Here are a few of the items we considered in our model updates:
1) Revenue & Average Selling Price (ASP): We backed into the 4Q15 ASP for Model S using the following assumptions:
Management guided the percentage of cars leased vs sold to be consistent with the third quarter, so we left the non-GAAP lease accounting adjustment as a percentage of auto revenue constant at 26.5%. The Model X revenue contribution was likely minimal for the fourth quarter with just 208 vehicles delivered (based on the press release from January 3, 2015). In our earnings model we assumed the Model X ASP was $130k.
We assumed there were no Zero Emissions Vehicle (ZEV) credit sales for 4Q15, consistent with management’s guidance on the last earnings call. For Service & Other Revenue we assumed a 6.8% sequential growth, which is in-line with historic averages. Using these assumptions, we solved for the Model S ASP which is required to get back to the non-GAAP consensus revenue estimate of $1.81B. The final Model S ASP in our model was $98.5k per vehicle. This brings the corporate average vehicle ASP for the fourth quarter to $98.8k, consistent with management’s guidance of a “slight” increase in ASP.
2) Gross Margin: Management guided Auto gross margin to decline slightly. We assumed a 20 basis point decline sequentially. For Services & Other, management guided gross margin to remain positive, we assumed 5% for 4Q15.
3) Operating Expenses: Management guided an improvement in operating leverage. We reduced R&D as a percentage of revenue to reflect the decrease in Model X development costs. We left non-GAAP adjustments for opex consistent with 3Q15 on a percentage of revenue basis.
4) Model Sensitivity: Our earnings model is very sensitive to changes in the Model X deliveries, and the cash burn/capex assumptions. As a result, small changes in these assumptions can have a significant impact on share valuation.
Management’s Guidance
EPS & Valuation Assumptions Ahead of the Release
Based on the assumptions above, we were able to get back to the consensus estimated 4Q15 and full year 2016 non-GAAP diluted EPS estimates of $0.08 and $1.54, which means the street is generally in-line with management’s forecast.
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%. For our market multiple valuation, we are using a 2016 Price-Earnings (PE) ratio of 99x excluding the value of net debt, which results in a valuation of $148 (19 x $1.54 - $3.99). Our DCF valuation of $162 is 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 is $155. Our multiple and primary DCF inputs will be held constant after the company releases results 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.
Source: Management’s guidance from the 3Q15 earnings call.
1) Revenue & Average Selling Price (ASP): We backed into the 4Q15 ASP for Model S using the following assumptions:
Management guided the percentage of cars leased vs sold to be consistent with the third quarter, so we left the non-GAAP lease accounting adjustment as a percentage of auto revenue constant at 26.5%. The Model X revenue contribution was likely minimal for the fourth quarter with just 208 vehicles delivered (based on the press release from January 3, 2015). In our earnings model we assumed the Model X ASP was $130k.
We assumed there were no Zero Emissions Vehicle (ZEV) credit sales for 4Q15, consistent with management’s guidance on the last earnings call. For Service & Other Revenue we assumed a 6.8% sequential growth, which is in-line with historic averages. Using these assumptions, we solved for the Model S ASP which is required to get back to the non-GAAP consensus revenue estimate of $1.81B. The final Model S ASP in our model was $98.5k per vehicle. This brings the corporate average vehicle ASP for the fourth quarter to $98.8k, consistent with management’s guidance of a “slight” increase in ASP.
2) Gross Margin: Management guided Auto gross margin to decline slightly. We assumed a 20 basis point decline sequentially. For Services & Other, management guided gross margin to remain positive, we assumed 5% for 4Q15.
3) Operating Expenses: Management guided an improvement in operating leverage. We reduced R&D as a percentage of revenue to reflect the decrease in Model X development costs. We left non-GAAP adjustments for opex consistent with 3Q15 on a percentage of revenue basis.
4) Model Sensitivity: Our earnings model is very sensitive to changes in the Model X deliveries, and the cash burn/capex assumptions. As a result, small changes in these assumptions can have a significant impact on share valuation.
Management’s Guidance
- 4Q15 Deliveries: Model X 208 units, Model S 17,192 units, which results in total ‘15 deliveries of 50,580, the low-end of the 50k to 52k range provided on the 3Q15 call (January 3rd press release).
- Model X production reached 238 units/week at the end of the year (January 3rd press release).
- Average production of 1,600 to 1,800 total vehicles per week in 2016.
- Expect average vehicle sales price to increase “slightly”.
- Gross Margin: Model S gross margin to improve from 3Q15; Total automotive non-GAAP gross margin to decline slightly from 3Q15. Model X gross margin to improve rapidly to reach Model S levels over the next several quarters. Service & Other margin is expected to remain positive.
- Direct leasing percentage in 4Q15 is expected to be consistent with 4Q15.
- No Zero Vehicle Emissions credit sales in 4Q15.
- Revenue and gross profit are expected to grow faster than operating expenses. Operating expenses are expected to increase sequentially in 4Q15.
- Capex is expected to be $500M in 4Q15.
EPS & Valuation Assumptions Ahead of the Release
Based on the assumptions above, we were able to get back to the consensus estimated 4Q15 and full year 2016 non-GAAP diluted EPS estimates of $0.08 and $1.54, which means the street is generally in-line with management’s forecast.
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%. For our market multiple valuation, we are using a 2016 Price-Earnings (PE) ratio of 99x excluding the value of net debt, which results in a valuation of $148 (19 x $1.54 - $3.99). Our DCF valuation of $162 is 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 is $155. Our multiple and primary DCF inputs will be held constant after the company releases results 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.
Source: Management’s guidance from the 3Q15 earnings call.
