Tesla: Fast-Tracked Production Leads to Fair Value Boost
The dramatic acceleration of Tesla’s production plans will lead to a significant increase in our fair value estimate -- to the $300 to $330 range -- writes Morningstar’s Dave Whiston.
The quarterly results are not important to us relative to the long-term growth plan of the company, which is the real value creation story. Due to initial orders for the Model 3 sedan of more than 400,000 units far exceeding even Elon Musk’s expectations, the company announced a dramatic acceleration to its production plans, driving our fair value increase. For years Tesla has said once the gigafactory in Nevada is operational, the company can make 500,000 vehicles a year in 2020. That timeline is now moved up to 2018 and Elon Musk went further during the call to say one million vehicles in 2020 is his best guess. Musk said this one million could be feasible with just the California plant and the gigafactory but he rightfully feels making all vehicles in one place to serve a global market does not make sense. Therefore, there is much uncertainty as to how much capital will be needed to meet these new hyper-ambitious targets. Management said additional capital raises are likely and it will come from both equity and debt. In light of the capital markets being readily available to Tesla, we plan to model $1.5 billion of equity issuance in 2016 as well as $1 billion of new debt. Capital spending guidance is now at least $2.3 billion this year from $1.5 billion.
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