2010 Goldman Sachs Case CompetitionTeam 37 Presentation

Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu

In-house processingfrom start to finish

Design Engineering Manufacturing Distribution Sales

Integrated Automobile Firm

Powertraintechnology

Core Competency

Unlike its rivals, Tesla owns its dealerships

Sales and Distribution

Overview of TeslaTesla is a vertically-integrated new-technology automobile firm

Political points

Government BackstopGovernment support is mutually-beneficial

• Goal: re-ignite, prop up automobile industry

• Score political points via “green tech” and “jobs”

• Cheap loans are an indirect government subsidy

• Political suicide to let Tesla fail and default

• Goal: to be green leader in auto industry

• Government support lends credibility to Tesla

• Expensive investments mitigated by cheap debt

• Loan guarantees encourage bank lending

• Loan guarantees incur zero upfront cost

Government

Tesla

Government’s interests are directly aligned with Tesla’s

Auto industry

Green Investments

Jobs

Assessment of ForecastIs management’s forecast realistic?

Revenue Units Sold (Model S) EBITDA Margins

2011E 2012E 2013E 2014E

$142

$782

$2,010

$2,416 (in millions)

2012E 2013E 2014E0

10

20

30 (in thousands)

Weighted ARPU Model S Sales Projection

• 20,000 annual target

beginning 2013 plausible• $84,716 in 2013

• $84,801 in 2014

• Comparable to other premium sedans

• <1% of global premium sedan market

Porsche Tesla BYD BMW Daimler SAIC

22.9%

16.5%15.3%

12.2%10.1%

5.8%

IndustryAverage

11.4%

EBITDA Margins Optimistic

• Management forecast puts

EBITDA margins at 16.5%

• Median industry margins 11.4%

• Mass production at

NUMMI

• Full integration may facilitate 5% additional margin

Opportunities Risks

Superior Technology• Industry leader in EV powertrains, car batteries• Vehicle performance on par with Mercedes

Upside and Downside RisksOpportunities and risks associated with valuation and IPO

Public Validation• Low-interest DOE loan provides financial health• In-line with green jobs agenda

Seasoned Management• Veteran executives with rich history of

innovation • Experienced in partnering with industry leaders

Unrivaled Brand Recognition• Long waitlist for cars not available until 2012• Large down payments secure consumer loyalty

Expansion Uncertainties• Uncertainty in 2012 debut of Model S• Design specs are still pending final review

From Niche to Mass Production• The Model S is expected to be high-volume

Lack of Infrastructure• Lack of ubiquitous charging stations

inconvenient• Public policy unable to match Tesla’s ambitions

Unclear Future Competitive Landscape• Established, well-funded rivals expected to enter

• Unrealistic production plan with current facilities

• Disruptive technologies may alter landscape

Assessing IPO NeedAn IPO is crucial to Tesla’s success

Why an IPO? Why now?

The IPO is necessary because even with DOE’s generous loans, Tesla stillneeds critical cushion and financing to successfully launch the Model S by 2012

* Detailed projections included in appendix

In full compliance with DOEterms and company needs

IPO TimingRecent IPOs have been grossly underpriced

Jan Feb Mar Apr May

$861

$1,218

$2,573

$1,345

$1,008

Year-to-Date Monthly IPOs

(in millions)

IPO Pricing Trends

Jan Feb Mar Apr May0%

25%

50%

75%

100%

Below In-Range Above

• Tesla is largely an American company

• Tesla targets the affluent… least affected

• DOE loan unaffected by overseas crisis

• S&P 500 has fallen 10% since early April

• IPO volume peaked in March; at year lows

• Increases Tesla’s cost of equity

But,

• >40% of IPOs are under-priced• IPO amounts should be significantly higher

• Strong IPO possible despite economic

woes

European Debt Crisis… Overblown

Jittery Capital Markets

Tremendous IPO Mis-Pricing

Strategic Capital RaisingTesla should plan its capital raising strategically

Phase 1 Phase 2 Phase 3

Initial Public Offering

• Amount: $175m

DOE Loan Draw

• Amount: $165m

• Jun-Aug, 2010

• Jun, 2010

Secondary Offering

• Amount: $85m

DOE Loan Draw

• Amount: $225m, $75m

• Jun-Aug, 2012

• 2011, early 2012

Secondary Offering

• Amount: $50m

DOE Loan Pay-down

• ($36m), ($97m),

($121m)

• Jan-Mar, 2014

• Dec 2012, 2013, 2014

To comply with DOE loan restrictions on liabilities/shareholder’s equity ratio starting in 2014

Secondary Offering (2014)

Extra financial cushion for the Model S debut in 2012. Imminent Model S launch increases investor confidence and our valuation

Secondary Offering (2012)

No additional debt beyond DOE loans due to low credit rating. Pay down debt as FCF explodes to improve capital structure, minimize idle cash

Debt Financing (2010-2012)

Discounted Cash FlowComputing the value using DCF

2009 2010 2011 2012 2013 2014

-1,000

0

1,000

2,000

3,000

Revenue and CFO

Revenue CFO

DCF

We apply a dynamic Re as we believe earnings normalization and large cash flows starting in 2013 will reduce risks to slightly above industry averages

(in millions)

(in millions)

2010 2011 2012 2013 2014-400

-200

0

200

400

Key Assumption

GrowthTerminal Growth Rate 5%

Multiples AnalysisComparables analysis

EV/EBITDA Multiple

Multiples Valuation

* Weighted average of each company from 2010-2013

EV/Sales Multiple

* Weighted average of each company from 2010-2013

(in millions)

15% 17.50% 20% 22.50%

4% 1251 996 823 710

5% 1509 1152 933 784

6% 1905 1368 1068 877

7% 2585 1684 1251 996

SummaryTesla should proceed with an IPO

• Tesla needs time-sensitive capital

• Expansion scheduled for 2012

IPO Need

• DOE loans, while hefty, are inadequate

Term

inal G

row

thCost of equity 2015+

Sensitivity Analysis (DCF valuation in millions $)

• Unrivaled technology and designs

• Second-to-none brand recognition

Tesla Deserves a Premium

• Huge potentials with Powertrain

• Raise no more than required amount

• Secondary offerings in 2012, 2014

• Compliance with DOE terms necessary

Strategic Capital Raising

• Model S rollout is delayed

• Margins fail to meet expectations

• No experience with mass production

Potential Risks

Appendix

Key AssumptionsKey assumptions and methodologies

• Dynamic Equity Cost of Capital (Slide 9)• We believe that Tesla’s high cost of capital (25%) is only applicable until it begins generating sustainable FCFs,

starting in 2013. If Tesla reaches that point, its risks are significantly reduced• Therefore, Tesla’s cost of capital should only be a little above industry averages as its risk level is not necessarily

higher, and it has a much more inexpensive source of debt financing than its peers. • Lack of Additional Capex Investment Opportunities• Tesla will have large free cash flows starting 2013 and cheap debt financing, so if a good investment opportunity

arises, it is able to leverage its source of cheap debt and free cash flows to take advantage of such an opportunity.

• Relative Weighting of Different Competitor-groups• We weighted the 2010-2012E ratios for each of our competitor groups, and weighed each of those values by

20%, 40%, 40% because we believe that is the most comparable to Tesla in terms of market and industry correlation.

• Computing Market Value Using Comparables• We chose 2014 (the first “normal” year for Tesla) to compare, and discounted that value to the present day (May

2010).• Discounting Starting Mid-Year• Our DCF models assume a valuation mid-year (June) of 2010. Therefore, the discounting periods are half-year

shifted, and only half of the first year’s DCF value is incorporated into the DCF value.

Income StatementTesla’s Projected Income Statement

Statement of Cash FlowTesla’s Projected Statement of Cash Flow

Balance SheetTesla’s Projected Balance Sheet

EV/EBITDA MultiplesComparables

Prices, ProductionTesla’s Projected Units and ARPUs

Revenue BreakdownDetailed View of Tesla’s Revenues