Forecasting Revenues for Tesla Motors, Inc. Tesla Motors, Inc. (hereafter, “Tesla”) is a Silicon Valley-based company that designs, manufactures and sells electric cars and electric vehicle power train components.

At the time of this case, the company was at a critical turning point, having completed a planned crossover of its product lines, wrapping up its production of its Roadster models and beginning production of its new Model S sedan (with the Model S platform expected to be used as a common platform to launch new electric vehicle models in the future).

Because of these unusual circumstances, forecasting for Tesla presents some definite challenges. Read the attached case “Forecasting Revenues for Tesla Motors (Part A)” to answer the following questions. Submit brief written responses and supporting computations at the start of class on October 30. For purposes of this analysis exercise, assume that it is near the end of 2012, and do not use outside resources.

1. For Tesla’s primary source of future revenue, is it reasonable to rely on trends in the historical sales in order to forecast future levels of sales? Why or why not?

2. Based on the information presented in the case, what is your best estimate of Tesla’s total revenues for the fiscal years 2013 and 2014? Show any supporting computations and briefly explain your estimates.

3. Apply your judgment to develop two additional revenue forecasts for each of 2013 and 2014: (i) a “best case” scenario and (ii) a “worst case scenario”. Show any supporting computations and briefly explain your estimates.

4. Based on the above analysis, compare your forecasted revenues to the analyst consensus (mean) estimates presented in the case materials. What does this suggest to you about the estimates of the analysts following this firm?

FORECASTING REVENUES FOR TESLA MOTORS (PART A) * TESLA MOTORS was founded in 2003 by a group of intrepid Silicon Valley engineers who set out to prove that electric vehicles could be awesome. Quoted from http://www.teslamotors.com/about (10/10/2012) In June 2010, Tesla Motors, Inc. (hereafter, “Tesla”) filed a prospectus for its initial public offering of 13.3 million shares at $17 per share on the NASDAQ (ticker symbol: TSLA). The basis of offering included the initial production of its first electric vehicle, the Tesla Roadster (in 2008) and its planned introduction of its next vehicle innovation, the Tesla Model S (first revealed in March 2009). A year after the drivable early prototype of the Model S was revealed, Tesla had received over 2,000 customer reservations with a minimum refundable payment of $5,000, despite production only being planned to begin in 2012. 1 At the end of September 2012, Tesla filed for a secondary public offering of just over 6.9 million shares. The last reported sale price of their stock had been $28.49 per share. 2 Tesla was co-founded by Elon Musk (who had previously founded SpaceX and co-founded PayPal), who continues to oversee the company’s product strategy as Chairman, Product Architect, and CEO. Intent on becoming a leading global manufacturer and direct seller of electric vehicles as well as electric vehicle technologies, Tesla’s strategy necessarily includes obtaining new funding, continuing technological advancements, and developing operational efficiencies. 3 • The need for funding remains substantial. Although Tesla had generated $147.5 million in revenue from its inception in 2003 through March 2010 (the quarter ended immediately prior to its initial public offering), it also had accumulated a retained deficit of $290.2 million.4 In January 2010, Tesla entered into a loan agreement with the United States Federal Financing Bank and the Department of Energy (DOE), pursuant to the Advanced Technology Vehicles Manufacturing Incentive Program, for two multi-draw term loan facilities in an aggregate principal amount of up to $465.0 million. By the time of their newly announced secondary offering, Tesla reported these funds had been fully drawn. 5 • On-going research and development is significant. For example, the cumulative capital expenditures and research and development costs for the Tesla Roadster from its inception in 2003 to the date Tesla delivered the first Tesla Roadster equaled approximately $125 million. 6 In 2011 alone, Tesla incurred additional research and development expenses of $209 million, with an additional $143 million incurred during the first six months of 2012. 7 * 1 2 3 4 5 6 7 Professor Susan Krische prepared this case as the basis for class discussion with preliminary research assistance provided by Ali Hayat and Raunak Butani, and thanks Doug Ilg for useful comments on the initial development and updates of this case. For full disclosure, the author became a reservation holder in June 2010, and retired her then-11-year-old compact car when she received her Tesla Model S in February 2013. However, the case is not intended to serve an endorsement, a source of primary data, or an illustration of effective or ineffective management. Please do not distribute this case outside of class without prior permission from the author. For ea