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Borna Rajic
Introduction to Financial Markets 
14 July 2017

Evaluating stock Market Movements

Module Leader Nikos Nitsas

Tesla

Overview

Tesla (until February 2017 called Tesla Motors) is an American company that was founded in 2003 in the city of Palo Alto by Martin Eberhard and Marc Tarpenning. The key figures are Elon Musk (CEO and Chairman), JB Straubel (CTO) and Franz von Holzhausen (chief designer). The company develops, manufactures and sells electric vehicles as well as solutions for storing electrical energy (Baer). In 2014, the company founded a subsidiary company Tesla Finance in order to provide leasing financing to business owners. Later, in 2015, Tesla launched the production of Powerpack industrial batteries, as well as Powerwall residential cells. In October 2016, the company introduced roofs with built-in solar panels Solar Roof, which can store energy inside the Powerwall 2.

In 2016, Tesla acquired SolarCity (Hawkins), which designs, finances and installs solar power systems. Thus, the company believes that this acquisition will help them become the only vertically integrated energy company in the world that offers integrated environmentally friendly energy products. In addition, in 2016, Tesla Inc. bought a German company Grohmann Engineering, which is a specialist in automated production (Lambert). As a result, Tesla has the opportunity to add 1,000 additional engineers in Germany in two years.

In addition to the production of cars, the company also develops heavy trucks and minibuses, which will also operate exclusively on electricity. In the future, the company is going to offer car sharing services on autonomous vehicles.

Tesla is considered a company that was created in order to facilitate the transition to environmentally friendly cars. Initially, the company developed sports cars and sedans for the elite market, but Model 3, which was recently announced but not yet launched in production, should become an affordable electric car for the mass market.

In order to ensure fast charging of Tesla cars, the company develops a network of Superchargers in North America, Europe, and Asia. These stations are quick chargers that can charge 50% of the car battery in as little as 20 minutes, and also provide a full charge in 75 minutes. Ordinary stations, for example, cope with the same task in 9 hours.

Tesla carries out marketing and maintenance of vehicles through subsidiaries located in North America, Europe, and Asia. Unlike most automakers, Tesla does not sell cars through independent dealers. Basically, Tesla salons are only demonstration areas, but you can make a purchase on the official website of the company. Because of this approach, Tesla sometimes faces financial problems, as in most US states, direct sales from the automaker are prohibited. Tesla faced legal claims, and in some states, the company lost court cases, and as a result, Tesla\'s sales were banned.

Financial position

One of the investors of the company are the founders of Google Larry Page and Sergey Brin, the founder, and president of eBay Jeffrey Skoll and Elon Musk. At the first stage, Elon Musk invested the most - 70 million dollars, which he earned on the sale of his stake in PayPal.

In June 2010, an initial public offer (IPO) of the company\'s shares was held. Over the past five years, the company shows a net annual loss. The company suffered the largest losses in 2015 when the company lost $900 million. But Tesla, like other Elon Musk companies (SpaceX, SolarCity), uses the existing assistance from the state. For example, the Nevada authorities granted the company tax privileges worth $1.3 billion to build a battery factory.

Part of the business\'s income is related to the legal peculiarities of the state of California. According to the Zero Emission Vehicle (ZEV) program, car manufacturers are obliged to supply a certain percentage of cars, which does not harm the environment, to the state, in particular, electric vehicles. Since all Tesla\'s cars are powered by electricity, they can resell part of their quota to gasoline-powered car manufacturers, for example, Honda and others. Thus, with each model \"Model S\" produced, the company earns up to $35,000 due to the resale of the quota.

In 2010, the US Department of Energy approved a loan of $465 million for Tesla (\"TESLA | Department Of Energy\"). According to The Wall Street Journal, Elon Musk also uses funds from SpaceX contracts for financing (Ramsey, Mullins and Pulliam). Moreover, Elon Musk took loans worth $475 million and used the shares that belong to him as collateral. This can create risks for other shareholders of his companies.

Stock market movements evaluation

The value of Tesla\'s shares shows a steady growth throughout the company\'s existence, so in this paper I will analyze the last year, explaining why the company\'s shares show such growth and at which periods the share price is slightly reduced. Despite the fact that last month the share price fell by 9.83%, the price for the year is still 45.33% higher than the previous period. At the moment, the price of shares is at around $323 (\"Tesla Inc: NASDAQ:TSLA\").

It is worth starting with the fact that Tesla\'s new master plan is to expand the number of products and services. They are going to introduce car sharing services, work on solar energy systems and develop the capabilities of self-driving vehicles. It also became known that Tesla is developing heavy trucks, which will be called Tesla Semi, as well as the development of minibuses. Moreover, Tesla is actively engaged in the development of an off-road car, which will be called Model Y, and which will be launched in production in 2019 or 2020 (Lambert). The company acquired SolarCity to create an integrated solar roof that will generate electricity. Tesla also said that they are going to launch car-sharing services on autonomous vehicles. If Tesla, as expected, will adhere to this plan, then the company\'s shares should continue to grow rapidly. Tesla will have a wider portfolio of products and services, as well as several sources of income.

Tesla is also actively engaged in mergers and acquisitions in order to achieve its goals and expand its business. For example, they purchased Grohmann Engineering in order to increase production capacity in the near future. In addition, they purchased SolarCity to improve the production efficiency of solar panels, as well as to reduce the costs of people. It is worth noting that the company SolarCity previously suffered losses. Elon Musk needs it in order to produce sets of devices that could receive and use solar energy, including for Tesla cars. Roofs \"Solar Roof\" were introduced in 2016, along with a power storage Powerwall 2.

In May, Tesla began accepting pre-orders for roofs with built-in solar panels and even presented prices for a new product. Modules that look similar to the usual tiled roofing will be produced in four versions. According to an estimate on the Tesla website, solar panels for a medium-sized home will cost about $22 per square foot. But in addition to installing solar panels, the buyer will also have to purchase a Powerwall 2 battery, which costs 5.5 thousand dollars.

Bloomberg estimated how much it would cost to install solar panels on a house with an area of two thousand feet (Randall). Expenditures amounted to 50 thousand dollars, and the amount of generated electricity amounted to 64 thousand dollars. Solar batteries should be delivered to US buyers this summer.

Despite the fact that the beginning of production of such a product is a success for the company, the cost of shares has increased slightly due to doubts about the profitability of these roofs with solar panels. First, in Bloomberg calculations, the savings on taxes received by families that install solar panels are deducted. It is not a fact that this economy will continue under the current president, Donald Trampe, and it is also not the fact that the family\'s income allows using this economy completely. Secondly, calculating the costs for 30 years ahead is very optimistic. During these 30 years, the cost of a kilowatt may change significantly, the purchasing power will change, and no one can guarantee that the money we know them now will remain the same after 30 years. Therefore, such calculations are meaningless, and no one can accurately say the benefits of installing such solar panels, which means that no one knows whether they will be popular and whether this development will bring money to the company.

The next reason that Tesla shares continue to grow is that Tesla is actively engaged in international expansion. The company plans to create more than one hundred points around the world, where it will be possible to purchase Tesla products. Since 2013, the company has started selling products in several new markets, in Europe, in China, Australia, Japan, and others. Moreover, in 2016 Tesla even began to accept online orders in South Korea. The company also takes orders in the UAE and plans to start selling in Oman, Saudi Arabia, and Bahrain. At the moment, the company is building its first store and service center in Dubai. In addition, Tesla signed a contract with the Dubai Road and Transport Authority. It is important to understand that these countries are potential customers of Tesla sports cars, the cost of which is too high for people in Europe or the US.

In order to cope with the shortage of lithium-ion batteries, Tesla builds Gigafactory in Nevada in order to produce cells in conjunction with large companies such as Panasonic (Lambert). In early 2017, Tesla informed that they were going to invest 350 million dollars in Gigafactory for the production of transmissions, electric motors, and reducers for Model 3, which should be released soon. Tesla started the production of batteries for Gigafactory and is going to complete the construction of Gigafactory 3, 4 and 5. As already mentioned, Tesla will receive tax benefits of $1.3 billion over 20 years from the state of Nevada. According to Tesla\'s forecasts, the cost of batteries should decrease by more than a third due to the production of Gigafactory.

Tesla is actively engaged in developing the network of Superchargers, which in 75 minutes fully charge the battery of Tesla cars, which is seven times faster than conventional charging stations (\"Supercharger\"). In 2017 the company is going to at least double the number of Superchargers around the world so that the total amount is not less than 10,000 pieces. Moreover, in addition to the installation of Superchargers, Tesla plans to increase the number of Destination Charging connectors to 15,000 pieces.

The company is most active in expanding its product portfolio to increase sales. For example, in August 2016, updated versions of the Model S and Model X cars with larger batteries were released. The Model S P100D with the Ludicrous mode is the fastest car the company currently produces and also has the largest range of all-electric vehicles in the world (Silvestro). Meanwhile, the Model X P100D with the Ludicrous mode is the fastest SUV. Finally, in March 2016, Tesla introduced itsthird generation electric car, called Model 3, which would cost twice as cheap as the Model S. Model 3 is a four-door five-seater sedan that can drive more than 215 miles on a single charge; and which accelerates from zero to 60 miles in just 6 seconds. In July 2017, the first car of this model was produced, which went to Elon Musk himself. Mass production is also scheduled for July 2017. In addition to Model 3, the company is also actively developing a fully independent car, and according to Elon Musk, it will be the world\'s first fully self-driving vehicle that should revolutionize the engineering market.

In addition, sales of Powerpack industrial batteries and Powerwall housing batteries significantly increase the company\'s revenues. Tesla started producing Tesla Energy batteries in Gigafactory. According to Tesla, about a third of the batteries produced in Gigafactory will be used for Powerwall. Later this amount, according to their forecasts, should increase to 50%. Tesla believes that there are a large number of potential buyers of energy products around the world. In addition, Southern California Edison chose Tesla for the largest lithium-ion battery storage project in the world. This project should significantly increase the company\'s revenues. In late 2016, Tesla signed an agreement with Panasonic on the production of photovoltaic cells and modules in Buffalo, New York, from the summer of 2017. They will use these elements and modules to create solar panels that will be installed on the roofs.

The active growth in the value of Tesla\'s shares in the spring began with the news that in May 2017 Ford reduced 1,400 jobs (Rosevear). The reduction was to be 10% of the total number of employees. At the moment, Ford employs about 200,000 people all over the world. Shares of Ford in 2017 lost about 10%, as the cost of development and research for electric vehicles and self-driven vehicles ate profits. Moreover, in addition to pressure from investors, Ford and other car manufacturers are under pressure from the new US president, Donald Trump, who wants to increase the number of jobs in Mexico. As a presidential candidate, he blamed Ford for many times because of their investments in factories in Mexico. Later, Ford said they were abandoning factories in Mexico to allocate $700,000 to a plant in Michigan, where they were going to produce electric and self-driven vehicles. Despite this statement, the company still follows last year\'s plans, wishing to transfer all small production to Mexico. Later in the month, Ford announced that Mark Fields, who in 2015 achieved record profits for the company, was replaced by Jim Hackett, who became the new CEO. Ford decided that they should become producers of cars on electronic energy, but it is evident that it is very far behind Tesla. Because of the news, the value of Tesla\'s shares rose by more than 6 percent.

On May 31, 2017, it was announced that SpaceX, headed by Tesla CEO Elon Musk, would try to reuse the Dragon spacecraft after an unmanned trip to the International Space Station. Previously, SpaceX has already proved that it can reuse the Falcon 9 missile. This was the third time that SpaceX successfully landed its rocket after launch. \"Dragon\" is a private transport spacecraft that was designed by NASA, which was to replace the space shuttles (Weitering). At the moment, \"Dragon\" is the only device in the world that is able to return from space to Earth. The first manned flights were scheduled for 2018. Moreover, it is assumed that a unique emergency rescue system will be created for the ship, which will be installed in the ship itself. According to Elon Musk, the engines of the emergency rescue system will probably be used when landing the spacecraft on land. Despite the fact that SpaceX is not Tesla, but because the executive director of both companies is Elon Musk, the value of the Tesla share is also partially dependent on the success of his other companies, including SpaceX, Neutral ink and SolarCity. Due to the good performance of SpaceX, the value of Tesla\'s shares continued to grow during this period.

Stock market prediction

Despite the fact that the company is now actively engaged in development and expansion, introduces a lot of new goods and services, and also buys companies, I believe that in the next six months the share price will fall precipitously. The main reason why the value of shares may grow is the new car Model 3, but it is also the reason for the decline in the value of the shares. During the year, the shares continued to grow in value, because people expected the production of this car in July 2017. Initially, Elon Musk focused on the production of 100,000 to 200,000 Tesla 3 cars by the end of 2017. Later this forecast was reduced to 80,000 cars at best. But now, in July 2017, Musk informs that in August only 100 cars will be produced, and in September - 1500. Therefore, even the quantity of 50,000 pieces seems unreal. The company is going to produce about 20,000 cars in December, which means that most likely they will not be delivered in 2017. In my opinion, the main problem of the company is that they want to do everything at once and because of this they do not have time. It is obvious that the divergence in predictions will negatively affect the value of shares, because already now they are rapidly losing value. Therefore, I believe that over the next six months, the shares will gradually fall by several percents per month, which will result in their cost being about $ 280. But I am sure that when the company finally launches the mass production of the Model 3 cars, the value of the shares will again grow a

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