Tesla – Financial Analysis and Statement Preparation
Being the CEO of Tesla, Inc. it is my pleasure to present a comprehensive report to the stakeholders, which would help them make a critical decision, and the prospective investors would be able to confidently invest in the entity. The company is an electric vehicle and clean energy entity based in Palo Alto, California. Its major products include “electric cars, battery energy storage from home to grid-scale, solar panels, and solar roof tiles, as well as other related products and services”. The importance of such products has augmented in recent years which have proved a good sign for the organization. To capitalize on this opportunity, the company’s developers have presented various innovative products and services to enhance the convenience and improve the lives and experience of domestic and commercial customers. It has already been 18 years since Tesla embarked on its quest for a high-end electric car. The automaker was founded in 2003 by Martin Eberhard and Marc Tarpenning, who would soon be joined by its iconic figure and current leader, Elon Musk. The name of the company comes from Nikola Tesla (1856-1943), inventor of genius in electricity and mechanics. In recent years the organization has experienced significant success. However, the operating and business environment also poses various challenges which the management is trying to effectively face to enhance the shareholder’s value and the benefits of other stakeholders. In the future, the company would follow its innovative approach to offer superior and technically advanced products and services to the customers to achieve all of its business objectives.
Tesla’s Business Model
From the very initial days of the entity, Tesla’s founder, Elon Musk took a unique, unprecedented approach to deal with things that were really different from all other car manufacturers that most people didn’t know about. The company sells directly to the customers through its online and physical stores. Although the number of vehicles delivered is still small, this difference is reflected in Tesla’s high market value. Every vehicle Tesla makes for its customers delivers more value than any other competitor, which is critical to a successful business. If customers are getting better deals, why would they buy from suppliers with inferior deals? The automakers’ approach to selling models with enhanced hardware features makes sense, as they make very good money from every vehicle sold and – more importantly – from spare parts and after-sales services. It is a strategy similar to Apple, which chooses not to negotiate in maintaining its significant image of the brand. The commercial advantage Tesla has brought to customers over a decade has contributed to the success of the company and it also proves that this business model is indeed sound.
Tesla’s Pricing Strategy
After having benefited for several years from the absence of a strong rival in the 100% electric niche, the Californian manufacturer must face increased competition. Tesla’s strategy is founded on the creation of consumer envy. The company makes no spend on any type of marketing and advertisements and chooses to assign its funds to the growth and expansion of its products. The company primacy is then to invest unceasingly. Moreover, it wants to set competitive prices to increase its brand share. This is clearly what led it to slash the prices of its best-seller, the Model 3 in several countries, including China and France. The substantial price reductions will delight buyers, but will not be without impact on margins, as already shown by the results of the fourth quarter of 2020. The Californian manufacturer has just lowered the price of its Model 3 by 14% in Europe. At the beginning of January, that of the just-released Model Y was reduced by 30% in China. The company has a desire to be more affordable, but also and above all to adapt to the offensive on the electric of other manufacturers.
The Current and Projected Costs
The Total Cost of Revenues
The total cost of revenues is the most important cost in the accounting books of the company. From the analysis of the figures in the 10K filing, it is clear that the total cost of revenues increased from 17,419 million dollars to 20,509 million dollars in 2019 which comes to 17.73 percent (Tesla-10k-2020, 2021, page 54). In 2020 it moved to 24,906 million dollars which is an increase of almost twenty percent (Tesla-10k-2020, 2021, page 54). For the current year to be prudent, it is estimated that the total cost of revenues would increase by another twenty percent and would come to 30,000 million approximately.
Research and Development Cost
The company attaches immense importance to cutting-edge research and development; therefore, R&D is a significant portion of its current cost, and this trend might persist keeping in view its long history as shown in the diagram. According to the latest 10 K filing “research and development costs are expensed as incurred” (Tesla-10k-2020, 2021, page 65). From the diagram, it is clear that from 2019 to 2020 the research and development cost increased by 11 percent (Statista, 2021). It is estimated that it would increase by another 11 percent in 2021. Under this estimation, it would be 1640 million dollars from the previous year’s figure of 1491 million dollars. The higher management of the company is aware of the importance of innovation. The experts also believe that innovation brings considerable value to organizations. They say with conviction that “abetted by IoT and Industry 5.0 phenomenon, innovation is indispensable for competitive advantage and economic growth” (Aslam et al., 2020). With time the company might increase the budget of research by more than ten percent.
Diagram 1- R& D cost has increased over the years (Statista, 2021).
Break-Even Analysis
The break-even of the company was at 24,906 million dollars in 2020. It was at 20,509 million dollars in the previous year (2019) and was at 17,419 million dollars in 2018. The trend reveals that with the passage of time the break-even point of the company was increasing consistently. It is projected that in the current year the company needs to earn significantly more than the previous year to attain break-even. In line with the previous trend, the break-even o the company would come at 29887.2 million dollars which would be more than the twenty percent of 2020. Many factors in the external and internal environment of the entity might alter the break-even point of the company. The details of such factors as mentioned in the following sections of this short report. The management is aware of the importance to reduce expenses which would help it to achieve the break-even point with relative ease. The details of such strategies are mentioned in the following sections of this report.
Pro Forma Financial Statements
The management of the entity has prepared pro forma financial statements to forecast the operational and financial performance of the company. Such statements play an important role in decision-making (Accounting Tools, 2021). It is expected that this set of statements would make it clear to the prospective investors that the management is visionary and believe in scenario planning. Moreover, they would believe that the company is on a growth trajectory.
Profit and Loss (Income Statement) (please also see Annexure 1)
| 2020 (Actual) (in millions of dollars) | 2021 (Forecasted) (in millions of dollars) | 2022 (Forecasted) (in millions of dollars) | 2023 (Forecasted) (in millions of dollars) | |
| Total revenues | 31,536 | 37,843 | 45,411 | 54,494 |
| The total cost of revenues | 24,906 | 30,000 | 36,000 | 43,200 |
| Gross profit | 6,630 | 7,843 | 9,411 | 11,294 |
| Total operating expenses | 4,636 | 5,100 | 5,610 | 6,170 |
| Income (loss) from operations | 1,994 | 2,743 | 3,801 | 5,124 |
| Income (loss) before income taxes | 1,875 | 2,250 | 2,700 | 3,240 |
| Provision for income taxes | 1,154 | 1,269 | 1,396 | 1,535 |
| Net Income (loss) | 721 | 981 | 1,304 | 1,705 |
Balance Sheet (please also see Annexure 2)
| 2020 (Actual) (in millions of dollars) | 2021 (Forecasted) (in millions of dollars) | 2022 (Forecasted) (in millions of dollars) | 2023 (Forecasted) (in millions of dollars) | |
| Total current assets | 26,717 | 29,389 | 32,328 | 35,560 |
| Total non-current assets | 25,431 | 26,703 | 28,038 | 29,440 |
| Total assets | 52,148 | 56,092 | 60,366 | 65,000 |
| Total current liabilities | 14,248 | 15,673 | 17,240 | 18,964 |
| Total non-current liabilities | 14170 | 14,879 | 15,622 | 16,404 |
| Total liabilities | 28,418 | 30,552 | 32,862 | 35,368 |
| Total stockholders’ equity | 22,225 | 25,540 | 27,504 | 29,632 |
Cash Flow Statement (please also see Annexure 3)
| 2020 (Actual) (in millions of dollars) | 2021 (Forecasted) (in millions of dollars) | 2022 (Forecasted) (in millions of dollars) | 2023 (Forecasted) (in millions of dollars) | |
| Total Cash Flows from Operating Activities | 5,943 | 7,131.6 | 8,557.92 | 10,269.504 |
| Total Cash Flows used in Investing Activities | (3,132) | (3,601.8) | (4,142.07) | (4,763.3) |
| Total Cash Flows from Financing Activities | 9,973 | 10,471.65 | 10,995.23 | 11,544.99 |
Sales Forecasts for the Short to Medium Term
The management is hopeful that the COVID-19 situation would improve in the coming months. The entity is optimistic regarding the mass vaccination campaigns. Apart from this, the technically advanced models of the company would help it to achieve higher sales. The company is working on advanced batteries as well. The short to medium-term forecast is summarized below in a tabular form.
| 2020 (Actual) (in millions of dollars) | 2021 (Forecasted) (in millions of dollars) | 2022 (Forecasted) (in millions of dollars) | 2023 (Forecasted) (in millions of dollars) | |
| Total sales | 31,536 | 37,843 | 45,411 | 54,494 |
Potential Challenges the Company may Face, Based on the Financial Statements and Projections.
The company faces a plethora of challenges. The immediate threat to its sales and operation is COVID-19. The second is the rising cost of operations; moreover, the challenges are emerging from the overseas competitors. Tesla has established an extensive electric charging network in the country; however, it needs to be extended to sustain growth. It is clear that such expansions need a lot of resources.
- Major Assumption and Estimates
- Profit and Loss(Income Statement) (please also see Annexure 1)
| 2020 (Actual) (in million dollars) | 2021 | 2022 | 2023 | |
| Total revenues | 31,536 | It is estimated and assumed that the revenue would increase by twenty percent from the previous year. | It is estimated and assumed that the revenue would increase by twenty percent from the previous year. | It is estimated and assumed that the revenue would increase by twenty percent from the previous year. |
| The total cost of revenues | 24,906 | It is estimated and assumed that the revenue would increase by twenty percent from the previous year. | It is estimated and assumed that the revenue would increase by twenty percent from the previous year. | It is estimated and assumed that the revenue would increase by twenty percent from the previous year. |
| Gross profit | 6,630 | The difference between total revenues and total cost of revenues | The difference between total revenues and total cost of revenues | The difference between total revenues and total cost of revenues |
| Total operating expenses | 4,636 | It is estimated and assumed that the revenue would increase by twenty percent from 2020. | It is estimated and assumed that the revenue would increase by twenty percent from 2021. | It is estimated and assumed that the revenue would increase by twenty percent from 2022. |
| Income (loss) from operations | 1,994 | The difference between gross profit and total operating expenses. | The difference between gross profit and total operating expenses. | The difference between gross profit and total operating expenses. |
| Income (loss) before income taxes | 1,875 | – | – | – |
| Provision for income taxes | 1,154 | It is estimated and assumed that the provision for income taxes would increase by ten percent from 2020. | It is estimated and assumed that the provision for income taxes would increase by ten percent from 2021. | It is estimated and assumed that the provision for income taxes would increase by ten percent from 2022. |
| Net Income (loss) | 721 | The difference of total Income (loss) before income taxes and total provision for income taxes. | The difference of total Income (loss) before income taxes and total provision for income taxes. | The difference of total Income (loss) before income taxes and total provision for income taxes. |
Balance Sheet (please also see Annexure 2)
| 2020 (Actual) (in million dollars) | 2021 | 2022 | 2023 | |
| Total current assets | 26,717 | It is estimated and assumed that the current assets would increase by ten percent from 2020. | It is estimated and assumed that the current assets would increase by ten percent from 2021. | It is estimated and assumed that the current assets would increase by ten percent from 2022. |
| Total non-current assets | 25,431 | It is estimated and assumed that the non-current assets would increase by five percent from 2020. | It is estimated and assumed that the non-current assets would increase by five percent from 2021. | It is estimated and assumed that the non-current assets would increase by five percent from 2022. |
| Total assets | 52,148
|
56,092 | 60,366 | 65,000 |
| Total current liabilities | 14,248 | It is estimated and assumed that the current liabilities would increase by ten percent from 2020. | It is estimated and assumed that the current liabilities would increase by ten percent from 2021. | It is estimated and assumed that the current liabilities would increase by ten percent from 2022. |
| Total non-current liabilities | 14170 | It is estimated and assumed that the non-current liabilities would increase by five percent from 2020. | It is estimated and assumed that the non-current liabilities would increase by five percent from 2021. | It is estimated and assumed that the non-current liabilities would increase by five percent from 2022. |
| Total liabilities | 28,418 | 30,552 | 32,862 | 35,368 |
| Total stockholders’ equity | 22,225 | 25,540 | 27,504 | 29,632 |
Cash Flow Statement (please also see Annexure 3)
| 2020 (Actual) (in millions of dollars) | 2021 | 2022 | 2023 | |
| Total Cash Flows from Operating Activities | 5,943 | It is estimated and assumed that the cash flows from operating activities would increase by twenty percent from 2020. | It is estimated and assumed that the cash flows from operating activities would increase by twenty percent from 2021. | It is estimated and assumed that the cash flows from operating activities would increase by twenty percent from 2022. |
| Total Cash Flows used in Investing Activities | (3,132) | It is estimated and assumed that the cash flows used in investing activities would increase by fifteen percent from 2020. | It is estimated and assumed that the cash flows used in investing activities would increase by fifteen percent from 2021. | It is estimated and assumed that the cash flows used in investing activities would increase by fifteen percent from 2022. |
| Total Cash Flows from Financing Activities | 9,973 | It is estimated and assumed that the cash flows from financing activities would increase by five percent from 2020. | It is estimated and assumed that the cash flows from financing activities would increase by five percent from 2021. | It is estimated and assumed that the cash flows from financing activities would increase by five percent from 2022. |
Conclusion
The company has an established history of success in the USA and other countries including, the EU. The entity is investing significantly in research and development, which would bring revenue in the near future. It is high time that the investors evaluate this golden opportunity to invest in the company.
Reference
Accounting Tools (2021). Pro forma financial statements. [online] Accounting Tools. Available at: https://www.accountingtools.com/articles/what-are-pro-forma-financial-statements.html.
Aslam, F., Aimin, W., Li, M. and Rehman, K.U. (2020). Innovation in the Era of IoT and Industry 5.0: Absolute Innovation Management (AIM) Framework. Information, 11(2), p.124.
Statista (2021). Tesla’s R&D costs 2010-2018 | Statistic. [online] . Available at: https://www.statista.com/statistics/314863/research-and-development-expenses-of-tesla/ [Accessed 20 May 2021].
Tesla -10k-2020 (2021). Tsla-10k_20201231.htm. [online] www.sec.gov. Available at: https://www.sec.gov/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm#Consolidated_Statmnts_of_Cmprehnsve_Loss.
Annexures
Annexure 1
Annexure 2
Annexure 3
