Tesla Inc.

Business strategy

Tesla, Inc. is an American automotive and Energy Company based in Palo Alto, California,
it was founded in July 2003, by two engineers Martin Eberhard and Marc Tarpenning, under
the name Tesla Motors. The company specializes in electric car manufacturing and, through
its SolarCity subsidiary, solar panel manufacturing.
It operates multiple production and assembly plants, notably Gigafactory, and its main
vehicle manufacturing facility at Tesla Factory in California. As of June 2018, Tesla sells
the Model S, Model X and Model 3 vehicles, and for energy storage
Products for use in homes, commercial facilities etc.
Also, it operates on solar energy systems include inverters that convert the electrical output
from the panels to a usable current compatible with the electric grid, racking that attaches the
solar pa panels to the roof or ground, electrical hardware that connects the solar energy
system to tesla monitors.

Market segments
Tesla Motors is unique because it is not merely selling cars but also selling new technologies.
Essentially, betting on Tesla Motors involves betting on a new technology. Simply put, Tesla
has created, and now dominates, the market for luxury, long-range electric automobiles, a
market that is distinct from both the market for less expensive electric vehicles and the
market for luxury gas-powered vehicles.
The company must not only sell cars but also build out the infrastructure necessary to support
the operation of those cars. In Tesla’s case, this involves building out a network of
superchargers, battery swap stations, and service stations.

Strategy
The mission of Tesla Inc. is to accelerate the world’s transition to sustainable energy since its
founding in 2003 by developing safe and at the same time high-performance automobiles.
And, also energy products incorporating grid, solar and storage services.
In early 2010’s Tesla Inc. didn’t have a brand name or neither an economy of scale, so their
strategy was to get a car into the automobile market, so they made the tesla roadster which is
a luxury car that was expensive until the end of 2012.
After anchoring their name in the automobile industry and reinforcing their business strategy
tesla plan was to fulfill their long-term business plan that included three approaches to the
automobile industry:

Sales: Tesla uses direct sales, unlike other car manufacturers who sell through franchised
dealerships. It has created an international network of showrooms and galleries built and
owned by the company in the most urbanized areas in the world. By owning the sales
channel, Tesla thrives to gain an advantage in the speed of its product development and at the
same time create a unique buying experience for their customers
Services: Tesla created services center where they have technicians “Tesla rangers”, that
helps customers with all technical issues in their cars or other tesla products, offering at the
same time in those facilities charging spots for their cars

Charging: Tesla has created its own network of Supercharger stations, places where drivers
can fully charge their Tesla vehicles in about 30 minutes for free. The purpose behind
building and owning these stations is to speed up the rate of switching to electric cars,
making those facilities accessible for all customers.

Financial Statement Analysis

Horizontal Analysis:

The revenue of Tesla Inc. is increasing rapidly every year, with an increase of 63% in average
in the period between 2014 to 2018, although the net income of the company was negative
during all the period and that’s due to the high operating expenses of the company.
We can also note in the appendix that the year 2017 was exceptionally bad for the company,
even though the revenues increased with 68% the operating expenses doubled after inspecting
the company’s reports on 2017 we realized that it was mainly due to manufacturing
difficulties, the company did not hit the production target, they planned to produce 2500 units
of model 3s but they produced 1500. in addition to that they had also batteries issues which
slowed their production during that year and increased their costs.
When we look closer to the expenses components, we note that there was an increase in R&D
of 100% during the 2017Q1 comparing to 2016 Q1, same goes also for the rest of the quarter
in 2017, 75% average increase in selling, general and administrative expenses for each
quarter of 2017 comparing to 2016.

Profitability analysis:

For the profitability analysis we computed different ratios, the Earning Per Share the portion
of a company’s profit that is allocated to each outstanding share of common stock, for Tesla
Inc. the EPS is negative in all the period of 2014 till 2018 meaning that the company has lost
money ,if we take as an example the minimal value of EPS through our chosen period -6.93
in 2015 we can say that each share has lost -6.93 dollars in value meaning that the
shareholders of the company are losing some portions of their stock price which is obviously
a very bad sign for the company’s profitability, we can also guess that ROE is also negative
throughout all that period.

The Asset turnover ratio is a comparison of the company’s sales to its asset, it is ranging
between 0.44 and 0.75, for 2014 till 2016 the ratios was declining from 0.68 in 2014 to 0.44
in 2016 and 2017 and reached the highest value in 2018. The downtrend in between 2014-
2017 is due to the constant increase in asset (for example increase of 150% in asset in 2016
comparing to 2015 which plumbed the asset turnover 0.57 to 0.44) but the company tried to
generate more sales to fix the problem in 2018.

Debt to equity ratio (D/E) is computed by company’s total liabilities by its shareholder
equity. For Tesla Inc. the ratio was 2.73 in 2014 and decreased gradually until it reached its
lowest value in 2016 and increased in 2017 and 2018 to 1.80, 1.90 respectively. After
inspecting the balance sheet of the company, we can easily see how the company didn’t
increase liabilities and in return increased their equity in each year by issuing new shares in
2015 and 2016, in 2017 and 2018 the company did the opposite and increase liabilities and
stopped issuing new shares.
Operating efficiency

A company is efficiently operating when it delivers its output to customers in the most cost-
effective way while ensuring the quality of the output; many ratios are calculated in term to
assess the company’s operating efficiency. A/R turnover is a ratio quantifying the company’s
efficiency in collecting the receivables, it’s calculated by dividing the sales of the company
by the receivables, for Tesla Inc. the A/R turnover mean between the periods of 2014 to 2018
is 22.37, which means that 4.47 % of sales are receivables.
A/P turnover - The accounts payable turnover ratio is a short-term liquidity measure used to
quantify the rate at which a company pays off its suppliers, it’s calculated by total cost of
goods sold divided by the average payables, so the bigger the ratio the better because the
company will have to pay less , for Tesla Inc. in 2014 the ratio was 3.3 and decreased in
2014 to 2.68 and there went in an uptrend to reach 6.13 in 2018 plus we did also a forecast of
this ratio on 2019 and 2020 and the values where still going up. This means that the
company is reducing its payables over time which is a very good sign of the operating
efficiency of the company.

Inventory turnover is a ratio showing how many times a company has sold and replaced
inventory during a given period it’s calculated by dividing the sales on the average inventory,
for Tesla Inc. mainly the inventory turnover is increasing throughout the period of 2014 to
2018, and that’s due to the increase in sales during all that period except for 2015 in which it
decreased from 3.3 to 2.68, we can note that the increase in inventory was bigger than the
increase in sales.

PPE turnover is revenues divided by PPE (property/plant/equipment), this ratio gives us an

idea about how many dollars of sales your company gets for each dollar invested in property,
plant, and equipment. In Tesla Inc. the company had 2.39 in 2014 as the highest value 2.39
meaning that each dollar invested in the asset is used to generate 2.39 in revenues, but this
number decreased in 2014 reaching the lowest value of 1.44 after resuming to an uptrend
during 2016 to 2018, reaching 1.96 in 2018.

As a conclusion of the operating efficiency part we can say that 2015 was the worst year for
the company, all ratios were showing that the company operating performance is decreasing
but they tried to fix this problem through 2016 to 2018 by improving their efficiency in
managing inventories, receivables and payables.

Analysis of risk

In this part we’re going to assess the risk in Tesla Inc. activity by analyzing some of the main
ratios of liquidity and solvency, with addition to an analysis of the company’s asset and
liabilities growth of the period of 2014 to 2018.

The Liquidity ratios are very important class of financial metrics used in order to determine a
debtor's ability to pay off current debt obligations without raising external capital:

The current ratio measure the company’s ability to pay it’s current liabilities by using its
current assets, calculated simply by dividing the current assets on the current liabilities, Tesla
Inc. have an average of 1.05 over the five years period with ratio higher than 1 in 2014 and
2016, and in 2015,2017,2018 a ratios below 1. This means that overall Tesla is struggling to
finance its current liabilities by cash ,receivables and inventories, by inspecting the balance
sheet we can see that the current asset in the 2015 decreased while the current liabilities
which caused the ratio to go from 1.47 to 0.99 and that’s due mainly to cash decreasing by
60% between 2014 and 2015.

The Quick ratio is the company’s ability to pay its current liabilities by its most current asset
like cash, receivables and marketable securities, it give us more information about the
company’s liquidity by omitting asset that are less liquid like inventories, for Tesla Inc. this
ratios is less than 1 in all the studied period except for the first year when it’s equal to 1, this
ratio confirms our analysis of components of the current ratios in the last paragraph. So
overall, the quick ratio of the company tells us that the company don’t generate enough
liquidity by its operations to meet their short-term debt.

The operating cash flow to total debt ratios gives an idea about how much time the company
need to repay its debt if it devotes all of its operating cash flow, the yearly operating cash
flow of the company are negative which gives us a negative ratio all over the studied period.
This is a very bad sign for the company’s solvency and if it doesn’t change in the upcoming
year the risk of bankruptcy will be very big.

Porter’s Five Forces Analysis

Competing firms:

Buyer demand is slowly decreasing

Switching costs are moderate
Numerous competitors
Limited number of luxury brand competitors and few electric luxury
Competitors are well established in the market and in the industry

Bargaining power of suppliers:

Suppliers must be highly specialized and diversified

Contracts are short term which could either increase or decrease power of suppliers
Technological parts require design modification

Bargaining power of buyers:

Cost of switching is slow
Buyer have the ability to negotiate prices
Buyer demand is decreasing and less than the supply
Buyers have the power to demand quality, better service and fair price.
Tesla offers differentiated products which decreases the power of buyers
Ability to delay purchases

Potential new entrants:

Capital requirements to become a car manufacturer are extremely high
Intellectual requirement is high
Strategic partnerships are not as difficult to cultivate
Brand loyalty of some costumers
Significant barriers to overcome when establishing manufacturing plants and distribution
channels.

Substitute products:
Public transit
Taxi
Uber
Car2Go
Lyft
Bicycle (Eco-Friendly emphasis)
 •Supply chain well •Narrow product line
established
•Limited brand
•Differentiated awareness
product
•Limit demographics
•Differentiated due to pricing
product
•Production delays
•Positive strategic
partnership •Low sales
•Global recognition •Cash flow struggles
for technological •Cash flow struggles
innovation and
product
management

Strengths Weaknesses

•Growing
market Opportunities Threats
•Competitors are
•Government beginning to
support produce electric
•Acquisition to vehicles which
improve Market reduce
share competitive
•Increasing oil advantage
and gas prices •Consumer ethical
•Market for behaviour has not
environmentall reached
y friendly maximum level
products •Economic
increasing downturn could
adversely affect
Tesla

PESTEL Analysis

Political
Tesla operates internationally in different geographical areas; the political patterns are
distinctive in each of them. However, in general it can be said, that the political environments
are highly favourable for Tesla on an international level across borders. With several
international protocols and Environment Protection Laws to reduce Co2 emission, Tesla can
take advantage of governments benefits, encouraging and incentivizing citizens to purchase e-
cars. Furthermore, Tesla is researching and strives to innovating in the energy sector. In the
United States Tesla can therefore apply for access to funds of energy loan programs for research
and development of new technologies.
Economic
As mentioned above, governments support the e-car industry by providing subsidies,
inducements and tax exemptions on zero emission cars. Tesla operates in generally
economically stable markets. Prior mentioned government subsidies support the accessibility
and economic environment for electrical vehicles. Tesla manufactures premium fully electrical
vehicle in a premium price level. Therefore, the target customers are in middle to high income
brackets. However, the sales price of Tesla vehicles is above the maturity of comparable fully
electrical vehicles from other automobile manufacturers.

Social
Over the last years the awareness about environmental effects and human induced climate
change has increased significantly. It has become a general topic of concern for society. A trend
towards favouring a more sustainable and eco-friendly style of living has been observed,
especially in European countries. This includes an urge to change to alternative means of
transports. These trends and tendencies are favourable for the acceptance and demand of Tesla
products.

Technological
New technologies and integrated solutions are vital for the further development of electric
vehicles. This is the core of producing fully electrical cars with competitive reach, safety and
convenience features. As this specific area of the car industry is still very young, the technology
has to be improved and innovated, wherefore large financial and human resources need to be
invested. Additionally, there is a need for charging station infrastructures, required to enable
long-distance travel. Implementing charger networks is costly and does not directly generate
revenue.

Ecological
Over the last several years, many car manufacturers have faced the competitive pressure to
produce eco-friendly or fuel-efficient vehicles. Environmental factors such as increasing
awareness of climate change lead to changes in operations and companies products and
services, because customers are getting more aware of environmental effects of production.

A firm’s remote or macro-environment is subject to the effects of ecological conditions covered

in this part of the PESTEL/PESTLE Analysis. In Tesla’s case, the following ecological external
factors affect the market which are climate change, expanding environmental programs and
rising standards on waste disposal.
Conclusion:
According to our internal and external analysis the macro-environment is relatively profitable
for tesla and especially criteria like social, ecological and technologic participate to shape a
solid ground for a next take-off. The present barriers for Tesla to such a take-off are the next
entries of traditional car makers in the electric car market. Indeed, these old companies have
important disposals and can produce far more than tesla currently do. Competitors’
assessment suggests the major part of traditional car makers will have start to deliver high
quality electric models from here to early 2020 maximum. Tesla had already invested money
to increase its production capacity but should inject time and energy to reach a sufficient
threshold soon enough to take the leader position in the high-quality electric car market
before its competitors. Otherwise it will be rude to recover.

Review of Financial Statements

1. Locate the footnote that discusses asset valuation. Describe how the company
values its assets.

At Cost : Tesla values Property, plant and equipment, including leasehold

improvements at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective assets, as
follows:

Depreciation for tooling is computed using the units-of-production method whereby

capitalized costs are amortized over the total estimated productive life of the
respective assets.

At Fair Value: Financial instruments such as money market funds and interest rate
swaps were classified based on fair value hierarchy because they were valued using
alternative pricing sources or models that utilized market observable inputs, including
current and forward interest rates.
 2. Management’s Discussion and Analysis (MD&A) relating to the company’s
financial performance and review the income statement.

2018 Overall Performance review:

In 2018, Tesla increased their scale of automotive operations, particularly ramp of Model 3,
and achieved total production of 254,530 vehicles and delivered 245,506 vehicles,
representing year-over-year increases of approximately 152% and 138%, respectively.
It also deployed 1.04 GWh of energy storage products, nearly tripling its 358 MWh of energy
storage deployments during 2017. Tesla also deployed 326 megawatts (“MW”) of solar
energy generation during 2018.
Expenses :
Cost of energy generation and storage revenue increased by $490.4 million, or 56%, in the
year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily
due to increases in deployments of Powerpack, Powerwall, and cash and loan solar energy
system projects.. Gross margin for energy generation and storage decreased from 22% to
12% in the year ended December 31, 2018 compared to the year ended December 31, 2017.
Additionally, increases in costs for cash and loan solar energy system projects, impairment
charges on solar energy system leasing arrangements, and temporary manufacturing under-
utilization of our Solar Roof ramp have further contributed to the decrease in Tesla’s gross
margin.

Economic changes that affected Tesla’s operation:

 Foreign exchange rate
Other income (expense), net, changed favourably by $147.2 million to a gain of $21.9 million
in the year ended December 31, 2018 from a loss of $125.4 million in the year ended
December 31, 2017. The change was primarily due to favourable fluctuations in foreign
currency exchange rates and gains from interest rate swaps related to its debt facilities year-
over-year.
 Interest Rate
The company is exposed to interest rate risk on its borrowings that bear interest at floating
rates. Tesla expects a hypothetical 10% change in its interest rates which would increase its
interest expense for the years ended December 31, 2018 and 2017 by $8.5 million and $7.6
million, respectively.

3. Review the statement of cash flows and the MD&A. Write up a half a page
discussing your company’s sources and uses of cash; discuss the company’s
Operating Activities, Investing Activities, and Financing Activities.

Summary of Cash Flows

Cash Flows from Operating Activities: Tesla’s Net cash from operating activities changed
favourably by $2.16 billion to net cash provided by operating activities of $2.10 billion
during the year ended December 31, 2018 from net cash used in operating activities of $60.7
million during the year ended December 31, 2017. This favourable change was primarily due
to the increase in net income, excluding non-cash expenses and gains, of $1.60 billion and the
decrease in net operating assets and liabilities of $554.6 million.

Cash Flows from Investing Activities: Tesla’s Cash flows from investing activities related
primarily to capital expenditures, which were $2.32 billion during 2018, $4.08 billion during
2017 and $1.44 billion during 2016. Capital expenditures during 2018 were $2.10 billion
from purchases of property and equipment, mainly for Model 3 production and the expansion
of its customer support infrastructure, and $218.8 million for the design, acquisition and
installation of solar energy systems under operating leases with customers.

Cash Flows from Financing Activities: Cash flows from financing activities during the year
ended December 31, 2018 consisted primarily of
 $1.18 billion of net borrowings under automobile asset-backed notes.
 $431.0 million of net borrowings under the senior secured asset-based revolving
credit agreement (the “Credit Agreement”)
 $334.1 million from the issuance of solar asset-backed notes.
 $295.7 million of proceeds from exercises of stock options and other stock issuances.
These cash inflows were partially offset by net repayments of
  $581.9 million under its vehicle lease-backed loan and security agreements (the
“Warehouse Agreements”).
 collateralized lease repayments of $559.2 million.
 repayments of $230.0 million of the 2.75% Convertible Senior Notes due on
November 1, 2018.
 repayments of $210.2 million under the revolving aggregation credit facility.

Revenue Recognition and Operating Income

1. Review the revenue recognition footnote. Describe the company’s revenue
recognition policy and assess whether or not the revenue recognition criteria are
consistent with the current revenue recognition standard.

On January 1, 2018, TESLA adopted the new accounting standard ASC 606, Revenue
from Contracts with Customers and all the related amendments (“new revenue
standard”) using the modified retrospective method. The prior period consolidated
financial statements have not been retrospectively adjusted and continue to be
reported under the accounting standards in effect for those periods.
A majority of Tesla’s automotive sales revenue is recognized when control transfers
upon delivery to customers. For certain vehicle sales where revenue was previously
deferred as an in-substance operating lease, such as certain vehicle sales to customers
or leasing partners with a resale value guarantee, they now recognize revenue when
the vehicles are shipped as a sale with a right of return. As a result, the corresponding
operating lease asset, deferred revenue, and resale value guarantee balances as of
December 31, 2017, were reclassified to accumulated deficit as part of its adoption
entry.

Following the adoption of the new revenue standard, the revenue recognition for
Tesla’s other sales arrangements, including sales of solar energy systems, energy
storage products, services, and sales of used vehicles, remained consistent with its
historical revenue recognition policy.

The corresponding effects of the changes to lease pass-through fund arrangements are
also reflected in its non-controlling interests in subsidiaries. Additionally, it has
considered the impact from any new revenue arrangements in the current year that
would have been accounted for differently under ASC 605, Revenue Recognition, as
an adjustment from adoption of the new revenue standard.

2. Describe your company’s R&D efforts (include figures and % of revenue if

possible) and discuss the importance of R&D to your company’s future. If
possible calculate the change in R&D expenditures over time.
 Research and development (“R&D”) expenses consist primarily of personnel costs for
the company’s teams in engineering and research, manufacturing engineering and
manufacturing test organizations, prototyping expense, contract and professional
services and amortized equipment expense. R&D expenses increased $82.3 million,
or 6%, in the year ended December 31, 2018 compared to the year ended December
31, 2017. This increase was primarily due to an $84.2 million increase in employee
and labour related expenses from headcount growth to support its business expansion
and $45.2 million increase in stock-based compensation expense related to an increase
in headcount and number of employee stock awards granted for new hire and
refresher employee stock grants. Additionally, there was an increase of $16.0 million
in facilities, freight, and depreciation expenses due to business expansion, offset by a
$69.7 million decrease in expensed materials as there were higher costs in the year
ended December 31, 2017 primarily related to Model 3 development.

3. Did your company write down any long-term assets? If so, which assets and why
(source the page number)? If so which assets, how much were they written down
and why (source the page number)? Locate authoritative support (citation) for
the treatment of asset impairments.

Tesla written down its inventory in the year 2018, 2017 and 2016.

The inventory is written down for any excess or obsolete inventories or when its believed that
the net realizable value of inventories is less than the carrying value. During the years ended
December 31, 2018, 2017 and 2016, Tesla recorded write-downs of $78.3 million, $124.1
million and $52.8 million, respectively, in cost of revenues. ( page no 104 ).

4. Did the company dispose of any long-term assets? If so, which assets and why
(source the page number)?

As part of restricting the energy generation and storage segment , Tesla disposed
certain tangible assets.
 5. Is your company restructuring? If so, discuss the implications of the
restructuring for proforma earnings.

During 2018, Tesla carried-out certain restructuring actions in order to reduce costs and
improve efficiency and recognized $36.6 million of employee termination expenses and
estimated losses from sub-leasing a certain facility. The employee termination cash expenses
of $27.3 million were substantially paid by the end of 2018, while the remaining amounts
were non-cash. Also included within restructuring and other activities was $55.2 million of
expenses (materially all of which were non-cash) from restructuring the energy generation
and storage segment, which comprised of disposals of certain tangible assets, the shortening
of the useful life of a trade name intangible asset and a contract termination penalty. In
addition, Tesla concluded that a small portion of the IPR&D asset is not commercially
feasible. Consequently, it recognized an impairment loss of $13.3 million.

6. Locate the tax footnote for your company. Does your company have a deferred
tax asset or liability? Explain what deferred tax assets and tax liabilities are.
What is deferred tax assets :
A deferred tax asset is an asset on a company's balance sheet that may be used to reduce
its taxable income. It can refer to a situation where a business has overpaid taxes or taxes paid
in advance on its balance sheet. These taxes are eventually returned to the business in the
form of tax relief, and the over-payment is, therefore, an asset for the company.

What is deferred tax liabilities :

A deferred tax liability is a tax that is assessed or is due for the current period but has not yet
been paid. The deferral comes from the difference in timing between when the tax is accrued
and when the tax is paid. A deferred tax liability records the fact the company will, in the
future, pay more income tax because of a transaction that took place during the current
period.
As of December 31, 2018, Tesla recorded a valuation allowance of $1.81 billion for the
portion of the deferred tax asset that they do not expect to be realized. The valuation
allowance on net deferred taxes decreased by $38.1 million, increased by $821.0 million, and
increased by $354.3 million during the years ended December 31, 2018, 2017 and 2016,
respectively. The changes in valuation allowance are primarily due to additional U.S.
deferred tax assets and liabilities incurred in the respective year. The 2017 additional U.S.
deferred tax assets are net of re-measurement from 35% to 21% as a result of the Tax Act.
There have been no material releases of the valuation allowance. Management believes that
based on the available information, it is more likely than not that the U.S. deferred tax assets
will not be realized, such that a full valuation allowance is required against all U.S. deferred
tax assets. Tesla has net $30.2 million of deferred tax assets in foreign jurisdictions, which
management believes are more-likely-than-not to be fully realized given the expectation of
future earnings in these jurisdictions.

Asset recognition:

Warranties

They provide a manufacturer’s warranty on all new and used vehicles, production powertrain
components and systems and energy storage products they sell. In addition, they also provide
a warranty on the installation and components of the solar energy systems they sell for
periods typically between 10 to 30 years. They accrue a warranty reserve for the products
sold by them, which includes their best estimate of the projected costs to repair or replace
items under warranties and recalls when identified. These estimates are based on actual
claims incurred to date and an estimate of the nature, frequency and costs of future
claims. These estimates are inherently uncertain given our relatively short history of sales,
and changes to our historical or projected warranty experience may cause material changes to
the warranty reserve in the future. The portion of the warranty reserve expected to be incurred
within the next 12 months is included within accrued liabilities and other while the remaining
balance is included within other long-term liabilities on the consolidated balance sheet. Due
to the adoption of the new revenue standard, automotive sales with resale value guarantees
that were previously recorded within operating lease assets require a corresponding warranty
accrual. Warranty expense is recorded as a component of cost of revenues in the consolidated
statements of operations.

Marketing, Promotional and Advertising Costs

Marketing, promotional and advertising costs are expensed as incurred and are included as an
element of selling, general and administrative expense in the consolidated statement of
operations. They incurred marketing, promotional and advertising costs of $70.0 million,
$66.5 million and $48.0 million in the years ended December 31, 2018, 2017 and 2016,
respectively.

Compensation

The company believes in the policy of stock-based compensation. They use the fair value
method of accounting for our stock options and restricted stock units (“RSUs”) granted to
employees and our employee stock purchase plan (the “ESPP”) to measure the cost of
employee services received in exchange for the stock-based awards. The fair value of stock
option awards with only service conditions and ESPP is estimated on the grant or offering
date using the Black-Scholes option-pricing model. The Black-Scholes option pricing
model requires inputs such as the risk-free interest rate, expected term and expected
volatility. These inputs are subjective and generally require significant judgment. The fair
value of RSUs is measured on the grant date based on the closing fair market value of our
common stock. The resulting cost is recognized over the period during which an employee is
required to provide service in exchange for the awards, usually the vesting period, which is
generally, four years for stock options and RSUs and six months for the ESPP. Stock-based
compensation expense is recognized on a straight-line basis, net of actual forfeitures in the
period (prior to 2017, net of estimated projected forfeitures).

2. Locate the footnote on inventory. What method does the company use? How does this
choice affect COGS and inventory values?
Talking about inventory, the company uses the method based on operations management
principles that emphasize quality. Inventories are stated at the lower of cost or net realizable
value. Cost is computed using standard cost for vehicles and energy storage products,
which approximates actual cost on a first-in, first-out basis. In addition, cost for solar energy
systems is recorded using actual cost. They record inventory write downs for excess or
obsolete inventories based upon their assumptions about on current and future demand
forecasts. If our inventory on-hand is in excess of our future demand forecast, the excess
amounts are written-off. We also review our inventory to determine whether it is carrying
value exceeds the net amount realizable upon the ultimate sale of the inventory. This
requires us to determine the estimated selling price of our vehicles less the estimated cost to
convert the inventory on-hand into a finished product. Once inventory is written-down, a
new, lower cost basis for that inventory is established and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis.
Should their estimates of future selling prices or production costs change, additional and
potentially material increases to this reserve may be required.
A small change in their estimates may result in a material charge to their reported financial
results.

Further this choice of theirs directly affect the COGS and inventory values. As we know that
COGS is directly linked to the profitability of the company through Gross Margin. A
company can increase its Gross Margin in two ways. It can increase the prices of the goods it
sells and keeps its Cost of Goods Sold unchanged. Or it can keep the sales price unchanged
and squeeze its suppliers to reduce the Cost of Goods Sold.
When it comes to inventory, it measures how fast the company turns over its inventory within
a year. A higher inventory turnover means the company has light inventory. Therefore, the
company spends less money on storage, write downs, and obsolete inventory. If the inventory
is too light, it may affect sales because the company may not have enough to meet demand.

3. How does your company depreciate its PP&E? Estimate the approximate age of the
company’s long-term assets (show your calculations). Discuss how this might affect your
projections for capital expenditures.

Property, plant and equipment, including leasehold improvements, are recognized at cost less
accumulated depreciation. Depreciation is generally computed using the straight-line method
over the estimated useful lives of the respective assets, as follows:

Depreciation for tooling is computed using the units-of-production method whereby

capitalized costs are amortized over the total estimated productive life of the respective
assets. As of December 31, 2018, the estimated productive life for Model S and Model X
tooling was 325,000 vehicles based on our current estimates of production. As of December
31, 2018, the estimated productive life for Model 3 tooling was 1,000,000 vehicles based on
our current estimates of production.

4. What type of long-term assets does your company have? Were any of those
assets impaired? If so why and what was the financial statement effect? Locate
authoritative support (citation) for the treatment of asset impairments.

Tesla does hold long term assets. The picture of it are as follows:

As we could see from the above table that the overall value of Tesla’s Long-term assets are
rising on a steady basis from fiscal year 2015 to 2018 on a continuous basis. The loss in
values within one of them is compensated by the other values within the subset.

5. Does your company have any long-term investments in securities? If so, how are these
securities accounted for and valued? How does the classification of the investments
securities as “available-for-sale” or “trading” securities affect the financial statements?

No, Tesla does not hold any long-term investment within securities.

Liability Recognition.

1. What types of current liabilities does your company have? Describe any contingent
liabilities disclosed by the company.

The current Liabilities of Tesla stands as following:

The types of current liabilities within Tesla statements are Accounts Payable, Accrued,
Deferred Revenues, resale values, customer deposits and current portion of long-term debts
and capital leases.
Tesla actually does not have any contingent liabilities on its balance sheet but they are more
subtly associated with the future projects of the company.

2. Has your company issued any public debt (bonds)? If so, was the debt issued at par,
discount or premium? How can you tell?

Tesla raised almost $1.8 billion in August 2017 with an unsecured debt offering. The bonds
pay a 5.3% interest rate and are due in August 2025. It initially traded at a slight premium of
$100.75 when they first hit the market but have been on a fairly continuous downward trend
since then. The bond traded at a premium as the price was higher than the face value after the
issuance. So, we could say it was trading at premium.

3. Does your company disclose interest payments in a footnote? If so, describe the
interest payments made by your company.

Yes, Tesla does disclose its interest payment over different types of equity and debts. Long-
term debt, including scheduled interest, includes our non-recourse indebtedness of $3.61
billion. Non-recourse debt refers to debt that is recourse to only specified assets of our
subsidiaries. Short-term scheduled interest payments and amortization of convertible senior
note conversion features, debt discounts and deferred financing costs for the year ended
December 31, 2019 is $361.2 million. Long-term scheduled interest payments and
amortization of convertible senior note conversion features, debt discounts and deferred
financing costs for the years thereafter is $1.58 billion.
They enter into fixed-for-floating interest rate swap agreements to swap variable interest
payments on certain debt for fixed interest payments, as required by certain of their lenders.
They do not designate our interest rate swaps as hedging instruments. Accordingly, their
interest rate swaps are recorded at fair value on the consolidated balance sheets within other
assets or other long-term liabilities, with any changes in their fair values recognized as other
income (expense), net, in the consolidated statements of operations and with any cash flows
recognized as investing activities in the consolidated statements of cash flows.

4. Describe how the company estimates the fair value of its debt.

Tesla issued convertible bonds last year and they account for the major debts which the
company comprises of. The value of its 2025 maturity bonds where seen highest when the
stock market and the share price of the company were plummeting.
5. Does your company have any operating leases?

Yes, the company has wide variety of operating leases under variety of their operations.
Automotive leasing revenue includes revenue recognized under lease accounting guidance for
our direct leasing programs as well as the two programs with resale value guarantees which
continue to qualify for operating lease treatment. Prior to the adoption of the new revenue
standard, all programs with resale value guarantees were accounted for as operating leases.
For certain international programs where we have offered resale value guarantees to certain
customers who purchased vehicles and where we expect the customer has a significant
economic incentive to exercise the resale value guarantee provided to them, we continue to
recognize these transactions as operating leases. For solar energy systems where customers
purchase electricity from us under PPAs, we have determined that these agreements should
be accounted for as operating leases pursuant to ASC 840. Revenue is recognized based on
the amount of electricity delivered at rates specified under the contracts, assuming all other
revenue recognition criteria are met.
Noncontrolling interests and redeemable noncontrolling interests represent third-party
interests in the net assets under certain funding arrangements,
or funds, that we enter into to finance the costs of solar energy systems and vehicles under
operating leases.

Automotive leasing revenue includes the amortization of revenue for Model S and Model X
vehicles under direct lease agreements as well as those sold with resale value guarantees
accounted for as operating leases under lease accounting. We do not yet offer leasing for
Model 3 vehicles. Energy generation and storage revenue includes sale of solar energy
systems and energy storage products, leasing revenue from solar energy systems under
operating leases and PPAs and the sale of solar energy systems incentives. Cost of energy
generation and storage revenue includes direct and indirect material and labour costs,
warehouse rent, freight, warranty expense, other overhead costs and amortization of certain
acquired intangible assets. In addition, where arrangements are accounted for as operating
leases, the cost of revenue is primarily comprised of depreciation of the cost of leased solar
energy systems, maintenance costs associated with those systems and amortization
of any initial direct costs. Cash flows from investing activities and their variability across
each period related primarily to capital expenditures, which were $2.32 billion during 2018,
$4.08 billion during 2017 and $1.44 billion during 2016.

Capital expenditures during 2018 were $2.10 billion from purchases of property and
equipment, mainly for Model 3 production and the expansion of our customer support
infrastructure, and $218.8 million for the design, acquisition and installation of solar energy
systems under operating leases with customers.

Equity Recognition –
1. Did your company issue additional equity (hint: did common stock at par value
change?)? If so, how much was raised and what were the proceeds used for?

No, the company does not issue additional equity in any form.

2. Did your company pay dividends (cash, stock, or a dividend split)? If so how much
and was it a change from the previous year? What has the dividend yield been at the
end of each of the last three years?

No, they do not give dividends. They have never declared or paid cash dividend on their
common stocks. They believe in the policy of reinvestment of dividends.

3. Does your company have preferred stock? If so, what are the characteristics of the
preferred stock (dividend rate, special provisions/characteristics, etc.)?

No, the company does not issue preferred stocks in any form of manner.

4. Does your company issue stock options? If so, find the footnote on stock options and
summarize how your company accounts for stock options. Locate authoritative support
(citation) for the treatment of stock options.

Yes, Tesla issue stock options but it is only limited to its employees. They use the fair value
method of accounting for their stock options and restricted stock units (“RSUs”) granted to
employees and their employee stock purchase plan (the “ESPP”) to measure the cost of
employee services received in exchange for the stock-based awards. The fair value of stock
option awards with only service conditions and ESPP is estimated on the grant or offering
date using the Black-Scholes option-pricing model. The Black-Scholes option pricing
model requires inputs such as the risk-free interest rate, expected term and expected
volatility. These inputs are subjective and generally require significant judgment. The fair
value of RSUs is measured on the grant date based on the closing fair market value of our
common stock. The resulting cost is recognized over the period during which an employee is
required to provide service in exchange for the awards, usually the vesting period, which is
generally, four years for stock options and RSUs and six months for the ESPP. Stock-based
compensation expense is recognized on a straight-line basis, net of actual forfeitures in the
period (prior to 2017, net of estimated projected forfeitures).
5. Does your company have any treasury stock? Did your company repurchase shares
this past year? Calculate the average purchase price of the treasury stock (for all
periods and for the current period if shares were repurchased in the current year).
Show the figures and/or the footnote to support your answer.

When it comes to treasury stocks, basic net income (loss) per share of common stock
attributable to common stockholders is calculated by dividing net income (loss) attributable
to common stockholders by the weighted-average shares of common stock outstanding for
the period. Potentially dilutive shares, which are based on the weighted-average shares of
common stock underlying outstanding stock-based awards, warrants and convertible senior
notes using the treasury stock method or the if-converted method, as applicable, are included
when calculating diluted net income (loss) per share of common stock attributable to
common stockholders when their effect is dilutive. Since they intend to settle in cash the
principal outstanding under the 0.25% Convertible Senior Notes due in 2019, the 1.25%
Convertible Senior Notes due in 2021 and the 2.375% Convertible Senior Notes due in 2022,
we use the treasury stock method when calculating their potential dilutive effect, if any.
Furthermore, in connection with the offerings of our bond hedges, they entered into
convertible note hedges.
However, their convertible note hedges are not included when calculating potentially dilutive
shares since their effect is always anti-dilutive.

Intercorporate Entities.

1. Describe your company’s investment in other companies (i.e. marketable securities,

joint ventures, subsidiaries, etc.). How are these investments accounted for on the
financial statements?

Tesla is a technology company in itself. Although it does have Joint Ventures or things of the
kind, but it certainly have a lot of subsidiaries under it ranging from automobiles to clean
energy companies.

2. Does your company have any intangible assets or goodwill? If so, describe these assets
and state how you as an analyst interpret these assets.

Yes, Tesla does have intangible subtle assets including Goodwill. It would be shown in the
picture below.
To analysts, goodwill on its own is not a bad thing. It simply represents the premium over
the estimated market value of the assets acquired when buying another company.

3. Does your company have any foreign operations? If so, what and where?

Tesla owns a lot of foreign subsidiaries which translates back to having a foreign operation.
The biggest ventures of subsidiaries owned by Tesla are Solar City, Tesla Grohmann
Automation, Maxwell Technologies just to name the few. The subsidiaries ranges from clean
energy projects to Artificial Intelligence in nature.

4. Does your company use derivatives to mitigate risk? If so, what types of derivatives
does your company use and how are they accounted for? Locate authoritative support
(citation) for the treatment of derivatives

Although with the presence of option purchase programme, the company does not use
derivatives as their hedging instrument to mitigate risks associated with its projects. The
details of the following could be shown in the diagram below.
Stock Price Performance and Valuation
2018 has been a monumental year for Tesla. They were able to ramp up production
of Model 3’s to nearly 7,000 per week, which far exceeded the goal of 5,000 per week by
year end. They sold nearly 140,000 Model 3’s which made them the best-selling premium
vehicle in the US for 2018, and the Model 3 was the best-selling passenger car in the US in
terms of Revenue for both Q3 and Q4. In terms of stock price performance, it wasn’t an
extraordinary year. Tesla stock (TSLA) was up around 4% for all of 2018, however when we
compare that to the index it is listed on, the NASDAQ, it compares favourably.

The return of the NASDAQ for 2018 was a -4.36%, and as for Tesla’s automotive
competitors, Ford and General Motors, both of their year-end stock performance was
significantly negative with Ford close to -35% and GM around -17%. So, comparing to the
index and competitors the positive year end price performance for TSLA stands out.
However, as we can infer from the graph above, Tesla’s stock price can be quite
volatile. We can see throughout the year there are multiple peaks and troughs where Tesla
out performed or underperformed versus the NASDAQ. In a deeper analysis of those peaks
and troughs we found that during Q3 the high stock prices witnessed occurred around
announcements regarding the expanded production of the Model 3 and when the Q3 results
were released confirming Tesla was looking like it was finally in a stronger position
financially due to the increased revenues from the sales of the Model 3. As for the troughs,
we notice that TSLA is very susceptible to negative publicity from its CEO Elon Musk. The
notoriously vocal Musk can create havoc for the stock price based on his public remarks. As
we noticed, most of the drops in the stock price occurred around times when negative news
came out. One period in Q1 when analysts were concerned Tesla wouldn’t be able to ramp
up Model 3 production to the levels Tesla anticipated, and also in Q4, Musk was in the news
regarding settling an SEC charge against him personally, that he committed fraud for falsely
tweeting he’d secured funding to take Tesla private.
Looking forward in terms of TSLA’s price performance we conclude that the stock
price has plenty of up-side potential. 2018 marked the first time in Tesla’s history that they
have the possibility of becoming sustainably profitable and cash flow positive due to the
continued and exponential success of the Model 3. As they have had negative earning in the
past Tesla’s showed a negative Earnings Per Share (EPS), but due to this new sustainability
and positive cash flow position, we’ve seen positive analyst estimates from Bloomberg for
continued positive EPS for Tesla in the coming years, averaging 5.15 in 2019 and 9.04 by
2020. These estimates seem fair however we are cautious as to not be to overly optimistic.
Tesla faces challenges in terms production. Specifically, trade import and export duties that
are increased due to President Trump’s “Trade Wars” could have a negative impact on
Tesla’s profitability and ability to increase sales in its foreign markets. This would impact
Tesla’s goal of producing 10,000 or more Model 3 cars per week. Lastly, an ongoing
concern, is the effect Elon Musk has on the company. His high-profile persona makes Tesla
and Tesla’s stock price a frequent target of criticism. Our concern is whether Musk’s persona
does more harm than good for Tesla’s share price.

Conclusion

Tesla stands to ensure higher earnings with an EPS of -2.55 in 2019, and -1.55 in 2020. We
see a decrease in Liabilities to Equity ratio, while dividends will not be paid in order to
increase the PE ratio. Also noticed is the forecast of stock price which’ll aim to reach a high
of $341.62 in 2019, and a higher price of $385.14 by 2020. One can see the Ratio of cash
from Operations to Total debt get minimized to zero. One good scene is the decrease of A/R
Turnover and A/P Turnover in Tesla Statements, which’ll ensure Tesla’s profitability and
ability to maintain their sheets.
While Tesla experiences a lot of volatility in comparison with NASDAQ and its 2 premier
competitors (Ford & GM), they stand to benefit from the fact that Elon Musk is holding the
barricades, with an intent to make Tesla the main automotive provider seeing that the world is
on its’ path to be more inclined towards electrical vehicles as compared to the gas guzzlers.
This is further cemented by the fact that subsidiaries owned by Tesla are primarily in clean
energy and AI conducive lines. The goal of producing 10,000 Model 3s per week could pay
off in the form of increased revenue, and result in P/E ratio shooting up. The Operating
Efficiency of Tesla has improved from 2015 to 2018. With the advent of crude oil poised to
be higher than the previous few years (think $70+), we can be rest assured that Tesla would
function better and increase their market share. Also, we can see that solvency ratios are
lower, which means that the company may have difficulty meeting its current obligations.
However, these low values do not indicate any critical problem. If Tesla has good long-term
prospects (as seen per estimates), it may be able to borrow against those prospects to meet
current obligations. As a recommendation, Tesla would be a stock to BUY/HOLD rather than
short selling.
Graphs