Morningstar | We See Higher Inherent Risk in the Tesla Story Right Now. See Updated Analyst Note from 20 May 2019
With Tesla's recent need to raise more debt, albeit convertible debt, and CEO Elon Musk's May 16 companywide email calling for "hardcore" measures to curb costs, we think the balance sheet and operational risk of investing in Tesla's stock has increased enough to merit raising our weighted average cost of capital. Moving our cost of equity to the highest risk band in our methodology and raising our credit risk rating results in a WACC increase to about 12% from about 10%. This change causes a 29% fair value estimate reduction to $171 from $240. We had wanted to see if Model 3 deliveries increased materially in second quarter following first quarter's delivery problems launching the vehicle in Europe and China, but the current risk environment made us uncomfortable leaving our $240 valuation in place.If Tesla materially improves its balance sheet and deliveries, we could significantly increase our fair value estimate, but for now we want to be conservative given Tesla is burning cash. With the balance sheet by our calculation now holding $8.6 billion in recourse debt, more competition coming from the Germans, and Musk saying in the email that he personally will sign off on every tenth page of outgoing payments to ensure that the spending is critical and the CFO will do so for every page, we think the market is right to be nervous about Tesla's financial health. For a long time in our view, Tesla has enjoyed investors forgiving its cash burn and debt load due to its growth story, but that market sentiment may be ending as Tesla struggles to transition to a high volume automaker.
Recourse debt due over the next few years include $566 million in convertible bonds due in November 2019, $103 million of convertible bonds due in December 2020, $1.38 billion of convertible notes in March 2021, and $977.5 million of convertible notes in March 2022. These convertible notes mostly have strike prices of over $300 a share, so Tesla's stock will need to appreciate for it to avoid needing cash to meet these obligations.
Tesla designs, develops, manufactures, sells and leases electric vehicles and energy generation and storage systems, and provides services related to its products. The company operates as two reportable segments: automotive, which includes the design, development, manufacturing, sales, and leasing of electric vehicles as well as sales of automotive regulatory credits; and energy generation and storage, which includes the design, manufacture, installation, sales, and leasing of solar energy generation and energy storage products, services related to such products, and sales of solar energy system incentives.
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