Case 16 Teaching Note Tesla Motors in 2016
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Vehicle leasing program—Tesla, in partnership with various financial institutions, began leasing
vehicles to customers in 2014; the number and percentage of customers opting to lease Model S vehicles
increased substantially in 2015. By year-end 2015, Tesla was not only offering loans and leases in North
Even though Tesla received full upfront payment for the vehicles sold under the resale guarantee financing
program, generally accepted accounting principles (GAAP) required Tesla to treat transactions under
the resale guarantee program as leased vehicles and to spread the recognition of revenue and cost over
the contractual term of the resale value guarantee (36 to 39 months). If a Model S owner decided not to
The resale guarantee program exposed Tesla to the risk that the vehicles’ resale value could be lower
than its estimates and also to the risk that the volume of vehicles sold back to Tesla at the guaranteed
ratings. All three of these types of regulatory credits had significant market value because automotive
manufacturers whose vehicle sales did not meet prevailing emission and mileage requirements were
allowed to achieve compliance by purchasing credits earned by other automotive manufacturers. Tesla
had entered into contracts for the sale of ZEV and GHG credits with several automotive manufacturers,
and it also routinely sold its CAFE credits. Tesla’s sales of ZEV, GHG, and CAFE credits produced
Wall Street analysts frequently noted that the revenues Tesla earned from the sales of regulatory credits
were a material factor in preventing Tesla’s bottom line from looking significantly worse in 2013, 2014,
that energy-conscious homeowners with a rooftop solar system could use to lower their monthly electric
bills by programming Powerwall to power their homes during certain hours when the rates of some
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power companies were high and then recharging the battery during the late-night hours when rates
were low. However, Powerwall home batteries could also be used as a backup power source in case of
unexpected power company outages. Homeowners with energy needs greater than 7 kWh or 10 kWh or
for periods longer than the life of a single battery charge (about 2 hours) could install multiple models.
Both Powerwall models were guaranteed for ten years.
In the first week after the announcement introducing Powerwall and Powerpack, Tesla received 38,000
reservations for Powerwall (although residential buyers could place a reservation with no money down)
and requests from 2500 companies indicating interest in installing or distributing Powerpack batteries.
In the remaining months of 2015, Tesla moved swiftly to prepare its supply chain and production teams
Tesla to realize positive cash contributions despite rapid growth in production and sales. Musk said that
buyer demand for Powerwalls and Powerpacks might prove strong enough in 2016 for the company
to consider expanding the battery-making capacity of the Gigafactory beyond the amount currently
planned.
Panasonic agreed to partner with Tesla in building and operating the Tesla Gigafactory in mid-2014.
According to the agreement, Tesla had responsibility for preparing, providing, and managing the
Financing strategy—During its early years, Tesla financed its startup costs and capital expenditures
via a number of issues of common stock, a $450 million loan from the U.S. Department of Energy
in 2009 (which was repaid in 2013), and the issue of $660 million of convertible senior notes.
Shortly after its gigafactory announcement, Tesla announced that it had sold $920 million of convertible
senior notes due 2019 carrying an interest rate of 0.25 percent and $1.38 billion in convertible senior
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Tesla ended 2015 with $1.2 billion in cash and cash equivalents. Executive management expected that the
company’s current level of liquidity, coupled with projected future cash ows from operating activities,
were likely to provide adequate liquidity in 2016 based on current plans. However, if market conditions
proved favorable, management said would evaluate the merits of opportunistically pursuing actions
to further boost the company’s cash balances and overall liquidity. Top management expected that the
2. Which one of the five generic competitive strategies discussed in Chapter 5 most closely
approximates the competitive approach that Tesla is employing?
We think Tesla’s strategy is one of focused differentiation (because the Model S and the Model X are
aimed at the luxury segment of the automotive industry and because Tesla vehicles are equipped totally
with electric powertrains). However, students should recognize Tesla’s strategy is on the verge of evolving
into broad differentiation when the Model 3 is introduced and the market for Tesla vehicles becomes much
3. Are you impressed by the strategy Elon Musk has crafted for Tesla? Why or why not?
Class members are likely to be highly impressed by Elon Musk and the strategy he has crafted for Tesla
Motors. In our view, the strategy is
Bold
The pieces fit together very, very nicely. And, so far, it seems to be working (except for the fact that the
company has yet to prove it can operate profitably—which may or may not occur when Model 3 sales
To stimulate class debate, you might ask some of the following questions:
Is the strategy risky? Too risky?
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What do you believe the buyers of Tesla’s common stock and the buyers of the company’s recently
issued convertible senior notes think about the strategy? Do you think they believe in the strategy
and in Elon Musk? If Elon Musk were to leave the company, what do you think would happen to the
company’s stock price and its chances for success?
Do you see any parts of the strategy that, in retrospect, Elon Musk might/should have done differently?
4. What is your assessment of Tesla’s financial performance as shown in case Exhibit 2? Use
the financial ratio information in Table 4.1 of Chapter 4 to assist you in calculating a revealing
set of financial ratios and interpreting them.
Even a cursory look at the numbers in case Exhibit 2 make it clear that Tesla Motors started having bottom-
line problems in 2014-2015. But we are strong believers in having students crunch some numbers and form
an analysis-based opinion (as opposed to letting them get by with an off-the-cuff opinion).
Here is what some modest number-crunching reveals:
Automotive sales have (not surprisingly) mushroomed since 2011, jumping from $101.75 million in
2011 to $3.74 billion in 2015, a compound average growth rate (CAGR) of 146.2%.
Total revenues from all sources climbed from $204.2 million 2010 to $4.05 billion in 2015, a CAGR of
111.0%.
Tesla’s loss from operations was an “alarming” $716.6 million in 2015—384% above the operating
loss in 2014—this was due to the big 2015 increases in R&D expenses and selling and administrative
expenses.
The company’s net loss grew from $254.4 million in 2011 (equal to a loss of $2.53 per share) to $888.7
million in 2015 (equal to a loss of $6.93 per share).
The company ended 2013 with no long-term debt on its balance sheet.
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So the conclusion about Tesla’s recent financial performance has to be a very cautious “so far, so good” in
light of all that the company is undertaking.
However, there is ample reason to be concerned about Tesla’s mounting losses. In 2015, Tesla reported a
net loss of $888.7 million on its sales of 50,332 Model S vehicles—equal to a loss of $17,650 per car. This
exceeded Tesla’s 2014 loss of $294.5 million on sales of 31,655 Model S vehicles (a loss of $9,290 per car)
So students should recognize that the real test of when/if the company will become profitable is probably
going to come in 2018 and 2019. Students can make a case that there are reasons to be optimistic about
5. What do we learn from the data in case Exhibit 3? Does the data provide additional valuable
information? Why or why not?
We contend the data in case Exhibit 3 provides valuable information because it reveals the effects of leasing
(and lease accounting) and stock-based compensation expenses on Tesla’s financial performance—which
otherwise are hidden in a GAAP-only financial performance presentation. Hence, providing investors with
Note: In discussing the GAAP versus non-GAAP data, students need to be aware that for
GAAP purposes, revenue on vehicles leased via Tesla’s banking partners was deferred and
recognized over the lease term, but Tesla added back the deferrals to its non-GAAP revenue
because it received all of the future lease payments up front from its leasing partners.
Further it is important that students should recognize that (1) Tesla’s leasing program offers advantages that
many customers will find attractive and (2) GAAP-based lease accounting tends to make Tesla’s financial
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To provoke debate, you might ask the class:
Does the GAAP versus non-GAAP presentation enhance investor understanding of the impacts of
lease accounting and stock compensation on Tesla’s financial performance or not?
Is it unwise/undesirable for a company to present financials that include non-GAAP information?
Would investors be better off (or less “confused”) were non-GAAP financials not made available
for scrutiny?
6. What are the issues/problems that Elon Musk and other members of Tesla’s top management
team need to address?
Students ought to come up with a “worry list” of issues/problems that includes most all of the following:
Whether and how fast to boost production capabilities for the Model 3, so that people who have placed
orders will not have to wait 2-3 years to get their vehicle?
Whether to expand the network of recharging stations in the United States, Western Europe, and China
What happens to buyer demand for electric-powered vehicles if gasoline prices stay below $3.00 per
gallon and expectations become widespread that they might remain there for several years or even much
longer?
Will the demand for Tesla’s electric vehicles in China prove to be strong and sustainable?
7. What, if any, changes/adjustments in Tesla’s strategy would you recommend that Elon Musk
consider?
There’s really nothing on the above worry list that Elon Musk and Tesla management are not fully aware of.
Tesla management can be expected to address these issues and be proactive in making strategy adjustments.
For example, accelerating company investments in production capacity to get more Model 3s into the
marketplace more quickly is certainly going to be a front-burner issue at Tesla. And it should be easy enough
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The point here is that students will likely have a hard time suggesting new/different actions that Tesla
8. What is your outlook for Tesla’s future performance and its prospects for revolutionizing
the global automotive industry’s use of gasoline-powered engines versus battery-powered
engines?
Without question, the views of class members can differ considerably on Tesla’s outlook and prospects for
actually revolutionizing the global automotive industry with its technologically disruptive electric-powered
vehicles. Here are some suggested questions you can pose to the class to spark debate pro and con:
How many vehicles would you estimate that Tesla is likely to sell in 2020?
Over the course of the next five years, is Tesla likely to become an attractively profitable company with
a rising stock price?
What is your forecast for production activity in 2020 at Tesla’s “Gigafactory” that is scheduled to
produce lithium ion batteries—would you speculate that production will be well below full capacity,
near or at full capacity, operating at overtime and in the midst of a major expansion, or operating at full
capacity with construction of a second/third plant underway at one or more other locations? ’
Will Tesla still be in business in 2020? If your answer is no, will it be because Tesla went bankrupt or
because it was acquired by another automotive manufacturer?
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Epilogue
In October 2016, Tesla released its third quarter 2016 results. Highlights included the following:
In Q3, Tesla delivered 24,821 new vehicles, consisting of 16,047 Model S and 8,774 Model X vehicles. In
addition, 5,065 vehicles were in transit to customers at the end of the quarter.
Total Q3 GAAP revenue was $2.30 billion, up 145% from Q3 2015, while total Q3 gross margin was 27.7%,
compared to 21.6% in Q2.
After $600 million in debt repayment, cash and cash equivalents were $3.1 billion at quarter end, compared
with $3.2 billion at the end of Q2.
During the quarter, Tesla opened 17 new stores and service centers to increase its customer support network
to 250 locations globally.
In August, Tesla announced the Model S P100D with “Ludicrous mode (P100DL),” making it the world’s
At the end of Q3, Tesla had 715 Supercharger locations globally, with 4,461 individual Superchargers; 97%
of the population in the continental U.S. and 86% of western Europeans were now within 150 miles of a
Supercharger.
All newly produced Tesla vehicles had the hardware needed for full self-driving capability. This same
capability would also be built into every Model 3. Eight surround cameras provided 360 degree visibility
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Gigafactory construction and Model 3 development both remain on plan to support volume Model 3
production and deliveries in the second half of 2017. Tesla completed Model 3 production line layouts and
planned to soon begin installation of new body welding and final assembly lines.
Tesla was proceeding with its announced to acquire SolarCity, a move that proved highly controversial among
investors because of SolarCity’s rising losses. In 2015-early 2016, SolarCity was the largest residential solar
Tesla energy storage products gained increased market acceptance, firmly establishing Tesla as a leader
in energy storage solutions, and surpassing competitors in the breadth and scope of offerings across the
residential, commercial, and utility-scale storage markets
In Fall 2016, General Motors announced that its freshly revamped all-electric Chevy Bolt, scheduled to hit
showrooms in November, would be rated at 238 miles on a single charge, giving it a longer range than Tesla’s
At the end of Fleming’s test run, the Bolt’s onboard computer indicated the vehicle had another 50 miles of
range, although the trip wasn’t made at maximum highway speed.
In November 2016, Jaguar announced it had developed a new I-PACE electric powered SUV capable of going
from 0 to 60 mph in roughly four seconds. The company estimated it would have a range of more than 310 miles
Tesla’s income statement for Q3 2016 and the first nine months of 2016 is shown below.
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Tesla Motors, Inc., Consolidated Statements of Operations
Q3, 2016 and First Nine Months 2016
(in thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
Revenues
Automotive $ 1,917,442 $ 769,015 $ 3,849,558 $ 2,417,247
Automotive leasing 231,285 83,540 507,085 206,718
Cost of revenues
Automotive 1,355,102 582,545 2,895,483 1,808,576
Automotive leasing 161,959 46,184 310,176 118,284
Gross profit 636,735 231,496 1,163,979 704,939
Operating expenses
Research and development 214,302 178,791 588,448 527,657
Selling, general and administrative 336,811 236,367 976,173 633,578
Total operating expenses 551,113 415,158 1,564,621 1,161,235
Provision for income taxes 8,133 1,784 15,628 7,991
Net income (loss) $ 21,878 $ (229,858) $ (553,577) $ (568,266)
Net income (loss) per share of common stock:
For the very latest information on developments at Tesla Motors, we urge that you check the press releases and
the investor relations sections at www.teslamotors.com.