Tesla Motors SWOT Analysis

Why Should People Invest in Tesla Stock Investment?

Tesla Motors Inc. is a leading designer, developer, manufacturer and seller of electric vehicles and energy storage products in the United States and the rest of the globe. Since its foundation in 2003 in Silicon Valley by a group of engineers, the company has specifically specialized in selling two electric vehicles – Model X SUV (sport utility vehicle) and Model S sedan (Richard). With a distribution of more than 107,000 Model S cars globally, Tesla Motors deals with the sale of energy storage merchandise under the name Tesla Energy Brand. In addition, Tesla manufactures, designs, monitors, maintains and sells solar energy systems to consumers including government agencies, and sells solar energy electricity to its customers (Liu). Most of its products are sold through a complex of Tesla stores, galleries and online through the internet (Foley).

Tesla services its electric vehicles at its company-owned service centers. The corporation has approximately 120 Tesla Ranger mobile technicians who provide services that do not require vehicle lifting. Tesla’s main competitors include Lexus, BMW, Mercedes, Honda, Toyota, Volkswagen, Ford, Mitsubishi and General Motors just to mention a few. In 2012, the company launched the first premium electric car in the world, Model S, which has redefined the concept of a four-door car (Cobb). The design of the vehicle accommodates seven passengers thus providing the comfort of a family car and, at the same time, having the speed of a sport car. The advantages and achievements brought about by Model S made it named as the Motor Trend’s 2013 Car of the year with a five start safety rating from the U.S. National Highway Traffic Safety Administration. The late 2014 saw the improvement of Model S to a dual motor all-wheel drive which improved the vehicle’s performance.

The thing that makes Tesla Motors unique among manufacturing companies is the sales approach to its consumers. It includes exclusive plans, techniques and concepts. As written in Forbes by Hartung “Tesla is a classic example of a disruptive innovator” (par.3). Despite the fact that the competitors of Tesla such as General Motors aim at innovation sustenance and producing cheaper vehicles, Tesla aims to manufacture much better cars. The company’s rivals delve into sustaining innovation and making slightly better and cheaper cars; however, Tesla still is the producer of better cars. The corporation made a mark initially by manufacturing an electric sports model vehicle that had very high speed as well as superior handling (Grant). Tesla produces its cars at its factory in California. The company is also expanding its manufacturing ventures to other areas, for example, to the Netherlands. Tesla has also partnered with Panasonic to reduce the costs of lithium ion battery packs (Grant 2016, p. 581).

Historical share prices reflect the influence of inability to achieve the firm’s projected sales on the value of Tesla. The cost of the cars made by the company, for instance, Model X, was much higher because of the cost of manufacturing. This was a big blow to the buyers thus many orders were cancelled. The year 2015 faced a significant increase in Model X sales, as it has been projected in the late 2014. The year 2016 saw an increase in the total sales of the novel cars manufactured by 60%. In the late 2017, Tesla plans to start the production and delivery of Model 3 (Woodyard 2016). Due to this, the company has forecasted high revenues in that year. Although the sales margin has not been constant over the fiscal years, there is a probability of projected improvement.

Investment Case

Tesla Motors Inc. is a globally expanding pioneer in manufacturing of electric vehicles. Its history in the National Association of Securities Dealers Automated Quotations System (NASDAQ) is controversial with debates surrounding the valuation of the company as an automobile industry of technology company (Grant). The corporation’s stock prices did well in 2013 and early 2014, but since then they have gone down to trade between $180 and $280 for the past two years (Jones). According to Brumley, the company is “continuing to scale up and reaching a certain level of self-sufficiency”. This means that the situation is improving. Tesla’s investment case is anchored on the market advantage of electronic vehicles. However, as time advances, the firm might be lagging behind the competitors to meet the matchup. Therefore, the investment case was formulated to make a brand that keeps customers from buying similar models of Nissan and Chevrolet even if the company continues lagging behind (McCowen).

Basically, Tesla deals with novel technological concepts. Thus, the company aims at dominating the motor market by the production of high-quality cars. Tesla has also developed infrastructure with the aim of supporting the technological innovations (Hardman). Some of the installed infrastructure objects includes mobile battery swap stations, service stations and superchargers (Team). Even though it appears non-achievable, Tesla has an enormous potential in the automobile industry. The company’s main unique strength lies in the ability to make its own model of electric vehicle – Model S the price of which is rather luxurious and has managed to hit a profit margin equivalent to more than a half of automobile industry profits. Thus, the investment thesis is that Tesla has a special technology that enables it to offer its products at an affordable price (Hardman). As a result, buyers of 200-mile electric sedans would have no option apart from Tesla’s products, at least for a considerable period of time. In addition, Tesla enjoys low battery costs compared to its rivals. In turn, its cars are cheaper making the company be a step ahead of competition both model and year wise.

Sector Outlook

Return Analysis

Historical results reveal that Tesla is a relatively young company experiencing volatile growth (Bowma; Mangram). According to Downie, firms with similar characteristics like Tesla do not focus on profitability but rather use capital generated from equity raises to fund corporate infrastructure and product development. This can explain the reason why Tesla has not recorded any net profits since it began disclosing its financial results (Liu). Its ROE has been negative with returns ranging from 227% to -19%. Tesla’s priority is on growth and not profitability. As a result, the company has opted to invest in marketing, corporate infrastructure and property.

In 2015, Tesla’s asset turnover was 0.58 resulting from revenue of $4 billion and an average asset turnout of $7 billion. This led to the reduction of 0.77 in 2014 as assets growth outpaced growth of sales. Secondary offerings earned the company $750 million which was used to advance the firm’s infrastructure to be used to generate revenue in future. These actions, in turn, reduce the value of ROE. The outcome of Tesla’s assets and shareholders’ equity totaling to $8 billion was an equity multiplier of 6.97, one of the highest that the corporation has recorded since its inception. This means that there is great improvement as the equity multiplier computes the measure of financial power, with large values signifying more power.

Polishing Your Writing to Make it Shine

Tesla’s ability to remain relevant in the market is dependable on four main sources; competitive edge in the electric vehicle domain, wonderful supercharge network, massive growth in the use of electric cars, and a nice reputation. All these factors have not only propelled the firm to attractive returns but have also helped in maintaining its name within the public domain. The company’s attractive innovation and invention of a strong supercharger network hosting more than three thousand superchargers in the United States provide expedient alternatives to its car consumers (Team). Definitely, the free charging alternative gives a competitive edge to other firms which are still struggling with pricing systems. While striving to maintain sales, the company has maintained a strong reputation with its market segment. One of Tesla’s major strengths is the ability to innovate creating excellent and outstanding products that serve the interests of people.

Cash Flow and Dividend Policy

From the look of Tesla’s cash flows, it is clear that the company is experiencing momentous growth as most of the money generated is reinvested with the aim of expanding the business. In addition, dividend policy is set accordingly. Tesla has never declared dividends. All future earnings from the company will be retained to finance future growth. As a result, the company is not planning to pay any cash dividends in the near future.

Corporate Governance

Elon Musk, the co-founder of Tesla assumed the responsibility of CEO in 2008. Musk succeeded Martin Eberhard who stepped down for unknown reason. Tesla’s Board of Directors is responsible for setting high standards for the Company’s employees. They are entrusted with the mandate to safeguard and manage shareholders and investors money. In order to fulfill their mandate and discharge their duties accordingly, the Board of Directors is guiding documents detailing the procedures and standards of the scope of their work. These guidelines are subjected to modification when time and need arises to suit to the best interests of the company.

The management team is comprised of:

1. Elon Musk – Chairman, Product Architect and CEO;
2. JB Straubel – Chief Technical Officer;
3. Jason Wheeler – Chief Financial Officer.

Risk Analysis

The automobile industry is relatively competitive. Prompted by this fact, we therefore give Tesla Motors Inc. a high risk rating. Some of the risks involved include:

Market Risk

• The firms’ inability to meet production timelines for new models in time
• Slow global economies characterized by decline in the demand for electric vehicles.
• The company’s over projection and low guidance estimates in delivery of vehicles. The production of high quality vehicles in time and required quantities squarely lies with the completion of the gigafactory
• Tesla’s production potential is still dependable on the gigafactory. Therefore, the firm must balance its production abilities with the existing models.

Revenue Risk

• Every quarter has been characterised by disconnect in Tesla’s growth rate in the stock market. Share prices have defined the term within the same market due to unachievable projected sales. For example, Model X‘s manufacturing expenses momentously affected the model’s price resulting to cancellation of orders and thus losses.
• Inconsistency in production also poses a major revenue risk to the company. The inconsistency in the production of Model 3 will affect its delivery since it is opposed to be launched in 2017. The CEO actually confirmed the inability of the firm to put the production process in up speed meaning the firm has to depend on older models.
• Competition in the market as other automobile dealers develop much better designs among them Mercedes Benz S which could challenge the dominance of Tesla in the electric sedan industry.

Default Risk

Tesla’s stock has taken a wide ride. An article by Das reveals that the “Tesla’s valuation is at odds with its default risk”. The company’s interest coverage depicts financial distress. According to Dan, the “Z-Score and Z”-Score for Tesla over past several years indicate that the company has shifted from “safe zone” to “gray zone”. In addition, the interest coverage rations indicate that if not careful, the company would have difficulties in servicing their loans and debtors.

SWOT Analysis

STRENGTHS

• Energy efficient: It is the most energy efficient car due to its use of solar energy and other sources of renewable energy
• Acts as a supplier to other manufacturers: Sedan manufacturers such as Toyota depend on Tesla for supply of car parts.
• Strong and dedicated investors: Current strong and dedicated investors such as Google, Panasonic, Toyota motors and Daimler are important entities within Tesla.
• Environmental friendly products: Tesla has managed to manufacture environmental friendly cars which do not emit emissions.

WEAKNESSES

• Time consuming deliveries: The duration of time taken to deliver the end products is quite long hence a limited manufacturing and distribution capacity.
• Huge debts: In the name of investing for future profits, the company has accrued huge debts which make it very vulnerable.
• Lack of adequate experience compared to competitors
• Expensive car models: Model X has created a bad impact in terms of pricing

OPPORTUNITIES

• Growing demand for electric vehicles: The demand for electric vehicles is growing day by day. This means big business in future
• Looming concerns on environmental conservation: Public concerns on environmental pollution and carbon emissions in the air give the automobile company an advantage to utilize its production capacity and deliver more environmental friendly end products

THREATS

• Opposition: The company is facing a lot of opposition from giant companies as well as political ends
• Competition: More companies are embracing the production of electric cars among them the Volkswagen
• Expensive end products: Tesla cars are very expensive and thus not affordable to different classes of people.

Conclusion

Away from car sales, Tesla has boasts outstanding monetary returns from solar energy supercharging stations and other ventures. These avenues propel high financially by empowering it with the ability to defend its financial status whenever sales are low. So far, Tesla has managed to survive with negative profit margins but has increased on its investments and its shares are still relevant in the stock market. Thus, Tesla will remain relevant in the automobile industry and make profits die to the growth of the use of electric vehicles. Projections have it that the sale of electric vehicles will double in the next decade. Among peers, Tesla’s business model has great advantage as our evaluations do not project a company that is contributing to the growth of the automobile industry but rather a growing company.