Business Strategy and Outlook David Whiston, CF A, CP A, CFE, Analyst, 22 July 2020 T esla has a chance to be the dominant electric vehicle firm and is a leading autonomous vehicle player as well as a vertically integrated sustainable energy company with energy generation and storage products, but we do not see it having mass-market volume this decade. T esla's product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high. The Model X crossover released in late 2015 starts at about $80,000, the Model S sedan's starting price is about $75,000, the Model 3 sedan starts at $37,990, and the Model Y crossover starts at about $50,000. T esla’ s U.S. customers no longer receive the federal tax credit. T esla’ s gigafactories, such as a lithium-ion battery plant in Nevada helping it soon have capacity for nearly 600,000 vehicles at the Fremont, California, assembly plant, are expanding. A new factory in Shanghai, wholly owned by T esla, opened in late 2019 with capacity for 200,000 Model 3 and another 150,000 units for Model Y online in 2021. Gigafactory Berlin (3 and Y) is under construction until 2021 as is a T exas plant for the Semi, Cybertruck, and 3 and Y 2020 delivery guidance before the coronavirus was to comfortably exceed 500,000, but that looks unlikely to us. T esla sold about 368,000 vehicles globally in 2019. Even if demand exists for 1 million vehicles, this quantity is small relative to total global auto production, which may reach 100 million units in the next few years. Thus, we think global mass adoption of pure electric vehicles is still years away , but T esla is the leader in the space. T esla will have growing pains, possible recessions to fight through before reaching mass-market volume, more competition, and needs to pay off debt. It is important to keep the hype about T esla in perspective relative to the firm's limited, though now growing, production capacity T esla's mission is to make EVs increasingly more affordable, which means more assembly plants must come on line to achieve annual unit delivery volume in the millions. This expansion will cost billions a year in capital spending and research and development and will be necessary even during downturns in the economic cycle. Important Disclosure: The conduct of Morningstar’ s analysts is governed by Code of Ethics/Code of Conduct Policy , Personal Security T rading Policy (or an equivalent of), and Investment Research Policy For information regarding conflicts of interest, please visit http://global.morningstar .com/equitydisclosures T esla Successfully Panders to Retail Investors With a 5-1 Stock Split Bulls Say O T esla has the potential to change the world with long-range EV technology , A V technology , and battery technology that can store solar energy that its products generate. O The cost advantage of recharging over gasoline is significant, and gas will probably never be able to catch up. Furthermore, the instant torque of EVs makes them fun to drive, as the vehicle is always at full power O Its unique Supercharger network makes T esla the only automaker directly trying to alleviate the range anxiety of buying an EV Bears Say O Investing in T esla carries tremendous uncertainty The market has high expectations for the stock, so a slowdown in growth, execution problems, or lack of capital could lead to a severe decline in the stock price. O The acquisition of SolarCity and Elon Musk's recent erratic behavior adds uncertainty The stock has massive key man risk. O Mass EV adoption by consumers could be many more years away than T esla expects. If demand does not materialize, the company is likely to struggle to recoup the costs of the gigafactory Audi, BMW , GM, Mercedes, and others are no longer ignoring BEVs. Morningstar Pillars Analyst Quantitative Economic Moat None None V aluation Q Overvalued Uncertainty V ery High High Financial Health — Moderate Current 5-Yr A vg Sector Country Price/Quant Fair V alue 1.60 1.14 0.80 0.83 Price/Earnings 664.0 — 16.2 20.1 Forward P/E 208.3 — 12.3 13.9 Price/Cash Flow 97.0 165.4 10.2 13.1 Price/Free Cash Flow 328.5 46.9 17.7 19.5 T railing Dividend Y ield% — — 2.46 2.35 Analyst Note David Whiston, CF A, CP A, CFE, Analyst, 11 August 2020 T esla stock rose about 7% in after hours trading on Aug. 11 following the company announcing a 5-1 stock split. Shareholders on record at Aug. 21 will receive four additional shares via a stock dividend for each one share already owned. Shares will be distributed after the market closes on Aug. 28 and the stock will trade split adjusted on Aug. 31. W e will likely set our split adjusted fair value estimate on Aug. 31 at about $145. This value reflects the split, time value of money since our last update, and a higher share count to incorporate the 207 million presplit diluted share count at June 30. Our post-split share count will be 1.035 billion. A split itself does nothing to change the intrinsic value of a company and we think T esla is doing this to make its stock more accessible to retail investors. The company said in its Aug. 11 release that the split is being done to “make stock ownership more accessible to employees and investors.” Since the coronavirus pandemic caused a rise in day trading, fractional shareownership may be on the board’ s mind. W e think a split is unnecessary but given Apple’ s recent 4-1 split announcement and tech companies having a history of splitting, going up, and then splitting again, it’ s not shocking to see T esla take this path. CEO Elon Musk also said on May 1 via T witter , on the same day that he tweeted that he was selling almost all his physical possessions and homes, that he felt T esla’ s stock price was too high. The stock opened at $755 that day and has more than doubled since then before coming back down in recent days, a downward trend the split news will now likely conveniently stop. In theory , T esla’ s stock should not go up on this news, but its rise after hours supports our point that retail investors will find the shares more attractive at the lower price. Economic Moat David Whiston, Analyst, 22 July 2020 W e do not see a moat yet because T esla is still relatively early in its life cycle and has a high degree of execution risk as it adds new models and new capacity This dynamic Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly V alued Overvalued Quantitative V aluation t USA TSLA Morningstar Equity Analyst Report | Report as of 12 Aug 2020 01:31, UTC | Page 1 of 15 T esla Inc TSLA (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 21:42, UTC 11 Aug 2020 23 Jul 2020 03:11, UTC 11 Aug 2020 11 Aug 2020 11 Aug 2020 Q 1,374.39 USD 751.00 USD 1.83 — 0.00 256.13 Auto Manufacturers Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? creates huge uncertainty as to whether the firm will succeed in making great product at an affordable price and whether enough consumers will make the switch from internal combustion engine and hybrid vehicles. There is evidence suggesting that T esla will succeed, but if not, T esla will remain an automaker for the wealthy In a January 2014 Automotive News interview , Musk said in regard to T esla making it: "I think we will, but this is not a bold assertion we unequivocally will. There is a possibility we may not." T esla's growth runway looks lucrative, but this growth also requires constant substantial reinvestment in platforms, the Nevada gigafactory--for which T esla is only spending about 40% of the total cost of about $5 billion, while suppliers pay the rest--and annual assembly capacity , since the eventual output limit of Fremont is uncertain, as is the cadence of T esla opening new plants overseas. During this growth phase, there will almost certainly be a recession or two. In times of economic uncertainty , it is difficult to say what T esla's sales volume will be or what access, if any , the firm will have to capital markets. T esla wants between 10 and 12 gigafactories in the long term. W e model return on invested capital below weighted average cost of capital until 2021 in light of high capital expenditure requirements and lower vehicle volumes in the early years of our forecast. W e also see risk of major value destruction should EV adoption flop or occur much more slowly than any of our three 10-year forecast periods assume, or if the company cannot meet its volume targets. For that reason, we wait for now to award T esla a moat, but we see a positive moat trend as a result of the strengthening of the firm's brand and its cost structure. Although we stress the uncertainty in investing in T esla today , the company's competitive position is better than some may expect from a tech startup that makes automobiles. Looking at our five moat sources, we see a case for brand (intangibles) and cost advantage as sources of a moat in the future. Some may argue for efficient scale, claiming that T esla is the dominant pure EV firm. Although Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE T oyota Motor Corp 7203 JPY 19,991,131 0 6.40 12.55 Nissan Motor Co Ltd 7201 JPY 1,589,411 0 -2.26 0.00 V olkswagen AG VOW3 EUR 73,457 223,568 2.48 12.67 Daimler AG DAI EUR 45,247 157,804 1.63 0.00 T esla's long range gives it a huge advantage over pure EVs on the market (402-mile EP A range for the long-range Model S versus about 300 for the Ford Mustang Mach-E, 259 miles for the Chevrolet Bolt, 226 miles for the Nissan Leaf, 234 miles for the Jaguar I-P ACE, and 204 miles for the Audi e-tron), we consider T esla's competition to be the entire auto industry rather than just EVs. There are far too many automakers globally for us to claim T esla's market is effectively served by a small number of players. Musk's own words do not support efficient scale. He wrote in a June 12, 2014, blog post announcing that T esla would not sue companies that use its patented technology in good faith: "Given that annual new-vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for T esla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-T esla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world's factories every day ." Fair V alue & Profit Drivers David Whiston, Analyst, 22 July 2020 W e are raising our fair value estimate to $751 from $731 per share. The change is from the time value of money and slightly better 2020-21 results after considering the firm's first-half 2020 performance. Our weighted average cost of capital is 8.8% and our midcycle operating margin is 11%. W e expect the company to remain a leader in autonomous technology and range. T esla is also gaining scale, and its ability to make desirable vehicles while generating free cash flow and net profit is far better than it’ s ever been, in our opinion. W e think T esla will continue to provide formidable competition to premium automakers, and its technology and range advantage may provide a pricing premium over mass market vehicles for a long time. W e model total deliveries over our 10-year forecast period of about 13.6 million. W e remain concerned about T esla’ s debt load, though less so than in the past due to more consistent free cash flow generation and a growing cash balance despite the virus pandemic. T esla is a volatile name and fair value estimate changes may be frequent as its story changes. W e add back about $4.6 billion of nonrecourse debt to our valuation. Morningstar Equity Analyst Report |Page 2 of 15 T esla Inc TSLA (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 21:42, UTC 11 Aug 2020 23 Jul 2020 03:11, UTC 11 Aug 2020 11 Aug 2020 11 Aug 2020 Q 1,374.39 USD 751.00 USD 1.83 — 0.00 256.13 Auto Manufacturers Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? W e model 2020 vehicle deliveries of about 400,000, 2021 deliveries of about 600,000, and about 900,000 in 2022. W e model capital expenditure of $3.3 billion in 2020. When modeling T esla in our discounted cash flow model, we keep an open mind regarding the disruptive potential of T esla on the auto and utilities industry as well as focusing on what the company can achieve in 10 years. For a young company like T esla, we think long-term potential is the more important question and value driver than how many Model 3 or Model Ys get delivered in a quarter Management's long-term guidance since its 2010 initial public offering is for an operating margin in the low teens to midteens. The guidance excludes stock option expense, whereas we include stock option expense in EBIT to capture the cost of diluting shareholders. T esla has upside margin potential if it can reduce its battery cost, significantly exceed our delivery estimates, and have a high-margin storage and autonomous ride-hailing business. W e model $2.2 billion of energy revenue in 2020, with that figure growing to about $6.6 billion by 2029. This revenue is about 4% of our fair value estimate. Risk & Uncertainty David Whiston, Analyst, 22 July 2020 Investing in T esla comes with tremendous uncertainties due to the future of electric vehicles and energy storage. If a recession hits, investors may not want to hold the stock of a firm whose story will not play out until next decade, or T esla could fail to raise capital when it needs it. Until an electric vehicle far cheaper than the Model 3 goes on sale in mass volume, there is no way to know for sure if consumers in large volume are willing to switch to an EV and deal with range anxiety and longer charging times compared with using a gas station. T esla is fighting a state-by-state battle to keep its stores factory-owned rather than franchised, which raises legal risk for T esla and could one day stall growth. Other automakers are entering the BEV space. If the company's growth ever stalls or reverses, we would expect a severe decline in the stock price because current expectations for T esla are immense, in our opinion. With a young, growing company , there is always more risk of diluting shareholders or taking on too much debt to fund growth. T esla also has customer concentration risk, with the U.S. and China constituting about 64% of 2019 GAAP revenue, up from 56% in 2015. W e see immense key-man risk for the stock, as T esla's fate is closely linked to Musk's actions. Should he leave the company or the SEC bans him from running T esla, we would not be surprised to see the stock fall dramatically Also, Musk has 18.5 million T esla shares as collateral for personal debt. Selling this block of shares quickly may cause a rapid fall in T esla's stock price. T esla will soon have formidable EV competition from German premium brands it does not have today It's uncertain if T esla vehicle owners will also want solar panels and batteries in sufficient volume to justify buying SolarCity Given the many uncertainties regarding investing in T esla today , including COVID-19 and the debt load, our fair value uncertainty rating will remain very high or extreme for a long time. Stewardship David Whiston, Analyst, 22 July 2020 W e award T esla a Standard stewardship rating. Musk is barred from holding the chairman role for three years following a 2018 settlement with the SEC on civil securities fraud charges. T esla must also appoint two new independent directors. In December 2018, T esla appointed Oracle founder Larry Ellison and W algreens HR boss Kathleen Wilson-Thompson to the board to fulfill the settlement. Ellison is a fierce Elon cheerleader , so we doubt he will give Musk any headaches. In November 2018, T esla named Robyn Denholm chairman. She has been on T esla's board since 2014 and has experience both in autos with T oyota Australia in finance and in technology as CFO and COO of Juniper Networks and CFO of T elstra and time at Sun Microsystems. W e like that she resigned as T elstra's CFO to focus full time on T esla. W e do not expect major changes in T esla day to day and still think it is the Elon Musk show Denholm's top priority in our view will be to keep Musk content and ensure he doesn't say anything to violate his SEC settlement. Musk in 2020 again attacked the SEC on T witter which makes us nervous given he already has a strike against him with the agency W e considered downgrading our rating after the all-stock offer to acquire SolarCity closed because the offer came about one month after T esla raised equity and at the time there was no disclosure of a possible acquisition. The deal to acquire a firm led by two of Elon Musk's cousins (who have since left T esla) after SolarCity's stock had fallen by 75% since early 2014 is not what we like to see. W e left our rating in place, however , because there is a valid strategic rationale for acquiring SolarCity , which is to make T esla a vertically integrated sustainable energy Morningstar Equity Analyst Report |Page 3 of 15 T esla Inc TSLA (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 21:42, UTC 11 Aug 2020 23 Jul 2020 03:11, UTC 11 Aug 2020 11 Aug 2020 11 Aug 2020 Q 1,374.39 USD 751.00 USD 1.83 — 0.00 256.13 Auto Manufacturers Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? company Musk, 49, is synonymous with T esla, and the stock could suffer should he resign. W e doubt he will resign soon, however , because shareholders approved a new 10-year performance award in January 2018. The plan has aggressive market cap targets for T esla’ s stock of up to $650 billion that are paired with 16 milestones focused on revenue and adjusted EBITDA targets. The revenue targets are as large as $175 billion and the adjusted EBITDA targets, which exclude stock-based compensation expense, are for as much as $14 billion. Up to 16 operational milestones may be paired with the market cap milestones for shares to vest. The market cap milestones start at $100 billion and go up in $50 billion increments afterward. As the board certifies each milestone, Musk receives one of 12 tranches of stock options. Each tranche is for about 1.69 million shares (about 1% of T esla’ s outstanding shares) and has a strike price of $350.02. Musk must hold any shares he exercises for five years (which we like a lot), and there is no acceleration of vesting for a change in control. It is also important that the plan gives clarity to Elon’ s status as CEO. W e do not think he wants to be CEO forever , but he has said he will remain involved with T esla for the rest of his life. This new award has vesting eligibility as long as Musk is CEO or stops being CEO to become executive chairman plus chief product officer Musk has many interests beyond T esla, so we expect he will not be CEO for the length of this award plan. T esla has estimated in the past that should Musk receive all the shares, he would own 28.3% of T esla. The plan is designed so that as T esla issues more shares, the maximum value of the compensation, which T esla estimates at about $55.8 billion, goes down. W e see this plan as very rewarding for shareholders, should T esla reach a $650 billion market cap. It’ s a plan that encourages massive growth in shareholder value over a long period and is done in a way that is easy to track with metrics reported in SEC filings. It also does not give Musk incentive to sell the company Musk beneficially owns about 21% of the stock. Musk is on the board along with his brother , Kimbal and many longtime connections of Elon's. In 2019, T esla proposed to reduce its classes of directors to two from three, which would mean two-year terms instead of three years but the proposal failed because too many nonvotes led to no supermajority of outstanding shares for the affirmative votes. This proposal was a step in the right direction but we see the 10 member board as still friendly to Musk. W e'd like to see the entire board up for election annually and more members with fewer ties to Musk. Musk has arguably too much responsibility serving as T esla and SpaceX CEO, plus running the Boring Company and artificial intelligence plans, which raises the risk of him being pulled in too many directions. Directors and officers own over 20% of T esla's stock (Ellison owns 1.7%), so Elon's interests are aligned with T esla's shareholders, but other shareholders are essentially along for the ride. T esla has various related-party transactions with SpaceX or The Boring Company for aircraft, battery components, and other equipment, but we see no alarming transactions. Morningstar Equity Analyst Report |Page 4 of 15 T esla Inc TSLA (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 21:42, UTC 11 Aug 2020 23 Jul 2020 03:11, UTC 11 Aug 2020 11 Aug 2020 11 Aug 2020 Q 1,374.39 USD 751.00 USD 1.83 — 0.00 256.13 Auto Manufacturers Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Analyst Notes Archive Coronavirus Not Y et Hurting U.S. Autos, but W e Expect Bad News at Least Through April David Whiston, Analyst, 12 March 2020 Before the coronavirus pandemic, we were more bearish on 2020 U.S. auto demand than most forecasts, as we explained in our Jan. 30 Auto Observer: Moats, Motors, and Markets. W e forecast a decline from 2019 of up to 3.6% to as low as 16.5 million. W e expected a continued off-lease surge to move consumers into used vehicles over new , and we still do. The virus’ impact on U.S. auto sales is still in its early stages, and there is little data as of March 12 to gauge the impact, so we are not changing our forecast at this time. No North American plants have stopped production yet due to parts shortages, but we expect earnings headwinds from air freight charges and production will be affected if Chinese parts plants don’ t reopen fast enough to keep North American plants moving. W e are keeping our forecast in place provided the highest fear levels from the virus subside in the next few months. W e’ve seen resumption of 0% financing from automakers, such as Chevrolet on certain Silverado pickup purchases, and lower interest rates following the Federal Reserve’ s rate cut may mitigate some damage. According to Automotive News, citing J.D. Power data, sales in Seattle fell 20% last week, while New Y ork state sales have not been affected. The Central Florida Auto Dealers Association this week said it has seen no virus impact to its members’ Orlando stores. Large abrupt declines from a health scare is not surprising to us, but we think it’ s too early to extrapolate numbers nationally or for the rest of 2020. Still, we expect poor sales numbers in March and April. U.S. light-vehicle sales for the first two months of the year were doing well, albeit helped by high incentives. According to W ards, U.S. sales through February rose 4.5% year over year , with all but three automakers (Ford, Nissan, and T esla) showing growth. Contrary to what the stock market is doing, we do not think it’ s time to panic, but uncertainty will remain for a while. Ford's First-Quarter Sales Slammed by Coronavirus, but All U.S. Autos to Be Decimated in April David Whiston, Analyst, 02 April 2020 Automakers finished reporting March and first-quarter U.S. light-vehicle sales on April 2. According to W ards, March sales fell 37.9% year over year and by 33.0% factoring in two fewer selling days in March 2020. 2020 sales through March are down 12.7%, with every major automaker except Kia falling. W e expect far worse April numbers because April will likely be a near total loss for the industry because of the coronavirus. Some dealers are doing home delivery or open for sales in some states, but this will not be enough to offset the massive damage caused by the virus. The March seasonally adjusted annualized selling rate of 11.37 million is the lowest since 11.25 million in April 2010. February 2009’ s 9.05 million may be beaten by April 2020 as a new industry low for data back through 1980. W e still think the uncertainty is too great to give a narrow range for 2020 sales and expect that uncertainty to last into at least May W e’ve seen industry forecasters with full-year 2020 sales between the low 11 million to over 15 million range, with many base-case numbers at around 13 million to slightly over 14 million. W e don’ t find any of these predictions unreasonable, as it depends on how fast consumers can come back to the showroom. Even a dire 2020 of under 11 million vehicles would not cause fair value estimates to change to where our U.S. auto coverage presently trades. Ford’ s total first-quarter sales fell 12.5% year over year Lincoln’ s sales rose 2.3% thanks to the new A viator crossover , but we calculate a 20.3% decline excluding the A viator The F-Series pickup fell 13.1%, partly from the virus and partly from timing of fleet deliveries. One of the few bright spots came from the new-generation Explorer crossover , which for retail channel sales grew 10.5%, with the company calling out strong growth in the Midwest and coastal regions. The T ransit van used by businesses grew 15.7% to have its best first-quarter volume since the vehicle debuted in 2014. T esla Posts a First Quarter Profit for the First T ime David Whiston, Analyst, 29 April 2020 T esla reported a record first quarter , and we calculate adjusted diluted EPS of $1.14 compared with first-quarter 2019 EPS of negative $2.90. W e expect large upward stock moves for T esla in May as results crushed the Refinitiv EPS consensus of a loss of $0.36. W e also expect second quarter will suffer from the firm’ s main plant in California being shutdown since late March, but once COVID-19 restrictions are lifted, we expect T esla to fill a large number of orders which are still coming in online. W e Morningstar Equity Analyst Report |Page 5 of 15 T esla Inc TSLA (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 21:42, UTC 11 Aug 2020 23 Jul 2020 03:11, UTC 11 Aug 2020 11 Aug 2020 11 Aug 2020 Q 1,374.39 USD 751.00 USD 1.83 — 0.00 256.13 Auto Manufacturers Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? understand given COVID-19 uncertainty that management cannot give 2020 delivery guidance, but we like that T esla continues to invest without slowing as evidenced by the Shanghai Model Y plant and Gigafactory Berlin both due to start production next year W e regret nearly halving our fair value estimate on March 18, partly based on a higher weighted average cost of capital due to T esla’ s 2025 bond yield exceeding 10%, because, in hindsight, that is the same time the bond yield peaked. Even a pandemic causes no fear for the market with this stock, and we're lowering our W ACC to about 8.8% from 12%. W e're also raising our midcycle operating margin back to 11% and raising deliveries over our 10-year forecast period because we think T esla will continue to provide formidable competition to premium automakers and have a million units of capacity by the end of 2021. These changes mean we are increasing our fair value estimate to about $731 from $239. If a recession can’ t stop T esla then virtually nothing will, and we expect the company to remain a leader in autonomous technology and range. T esla is also gaining scale and its ability to make desirable vehicles while generating free cash flow and net profit is far better than it’ s ever been. For the quarter , free cash flow was negative $895 million but this was mostly for inventory increases which we expect will become a free cash flow benefit once vehicles being held at the end of first quarter get delivered next quarter Regulatory Credit Sales Enable T esla to Post a Profit Which May Lead to S&P 500 Inclusion David Whiston, Analyst, 22 July 2020 T esla reported profitable second-quarter GAAP results, and adjusted diluted EPS of $2.18 rose significantly from the prior year’ s quarterly loss of $1.12. W e calculate T esla had a pretax loss of $278 million excluding $428 million of regulatory credit revenue. This is the fourth straight GAAP profit quarter which means the stock may soon be added to the S&P 500 index, likely leading to further gains for the stock as index funds and active managers wanting to keep pace with the index add the stock. GAAP free cash flow fell 31.9% year over year to $418 million, but we still consider it impressive because the Fremont plant was shutdown from the coronavirus for over a month and capital expenditure more than doubled to $546 million. The resumption of production made the working capital unwind from paying vendors, despite no new revenue coming in, less than management feared on the first-quarter call. T esla still hopes to deliver 500,000 vehicles this year which will be hard given first-half deliveries totaled 179,387. W e also are worried about California and other states instituting new stay at home orders due to COVID-19 cases surging. Second-quarter deliveries fell 5% year over year to 90,891, with combined Model S & X deliveries down 40% and combined Model 3 and Y up 3%. T esla said it remains difficult to predict further interruptions and consumer sentiment changes and that achieving the 500,000 target has become more difficult. W e are keeping our 2020 deliveries at 400,000 but we are raising our fair value estimate to $751 on the time value of money and better 2020-21 results. The company confirmed its next gigafactory will be in Austin, T exas and it will make all Cybertrucks and Semi, plus the Model 3 and Ys for the eastern U.S. Fremont will make all S & Xs, the new Roadster , and W estern U.S. 3 and Ys. CEO Elon Musk would not comment on the Austin plant’ s capacity but given Semi is due next year , we expect Austin to be at least partially complete next year T esla Successfully Panders to Retail Investors With a 5-1 Stock Split David Whiston, Analyst, 11 August 2020 T esla stock rose about 7% in after hours trading on Aug. 11 following the company announcing a 5-1 stock split. Shareholders on record at Aug. 21 will receive four additional shares via a stock dividend for each one share already owned. Shares will be distributed after the market closes on Aug. 28 and the stock will trade split adjusted on Aug. 31. W e will likely set our split adjusted fair value estimate on Aug. 31 at about $145. This value reflects the split, time value of money since our last update, and a higher share count to incorporate the 207 million presplit diluted share count at June 30. Our post-split share count will be 1.035 billion. A split itself does nothing to change the intrinsic value of a company and we think T esla is doing this to make its stock more accessible to retail investors. The company said in its Aug. 11 release that the split is being done to “make stock ownership more accessible to employees and investors.” Since the coronavirus pandemic caused a rise in day trading, fractional shareownership may be on the board’ s mind. W e think a split is unnecessary but given Apple’ s recent Morningstar Equity Analyst Report |Page 6 of 15 T esla Inc TSLA (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 21:42, UTC 11 Aug 2020 23 Jul 2020 03:11, UTC 11 Aug 2020 11 Aug 2020 11 Aug 2020 Q 1,374.39 USD 751.00 USD 1.83 — 0.00 256.13 Auto Manufacturers Standard © Morningstar 2020. All Rights Reserved. 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The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? 4-1 split announcement and tech companies having a history of splitting, going up, and then splitting again, it’ s not shocking to see T esla take this path. CEO Elon Musk also said on May 1 via T witter , on the