forecast period (implying a market share of 12%), there could be an upside of
5% to our price estimate. Tesla also faces significant execution risks (delay in
launching the Model X). Many newly developed plug-in vehicles have
experienced significant delays, including the Nissan Leaf, Chevy Volt, and
Fisker Karma.
Management is targeting a long-term gross margin of more than 25% on
electric vehicles. Although we expect the bulk of Tesla's total car sales
volumes to come from the Gen III, we believe that the Model X will generate
larger cash flows due to higher margins. The Model X is expected to be
priced between $70,000-80,000. We expect gross margins for the vehicle
could be as high as 29% eventually. If the company is able to achieve 2%
higher gross margins for the vehicle, there could be a 15% upside to our price
estimate. Conversely, if margins are lower by 3 points, there would be a 10%
downside to our price estimate. The main factors impacting the gross margin
include a) retail price of the Model X, b) materials and manufacturing costs,
and c) economies of scale in production. Retail price depends on Tesla's
ability to sell high margin options and accessories to customers as well as the
percentage of international sales, which command higher retail prices.
Material and manufacturing costs depend on commodity prices such as steel,
aluminum, and battery pack costs (which are expected to decrease
significantly over the coming years). Lastly, the economies of scale Tesla is
able to achieve at its Fremont manufacturing plant is an important factor for
gross margins. The company incurred higher than projected capital
expenditures in 2010 and 2011 in order to increase automation and in-sourcing
at its Fremont plant, which should aid margins.
— SOURCES OF VALUE —

The majority of Tesla's value comes from the Model X and the Gen III,
which will both be launched in the future (2015 and 2016 respectively).
Future model launches
Tesla Motors launched the Model S, a battery electric luxury sedan, in June
2012. The Model S is Tesla's first volume car, and its success is crucial for the
company's ambitious plans of becoming America's fourth automaker. After
selling more than 22,000 units in 2013 and around 31,500 units in 2014, Tesla
is targeting sales of 55,000 Model S sedans in 2015. The company's Fremont
manufacturing facility will be equipped to produce 50,000 Model S sedans by
the end of 2014 on a single shift, so production can be doubled by operating
on two shifts should demand arise. Tesla has also revealed its third model, a
crossover SUV called the Model X. The Model X will be based on the Model
S platform and will begin deliveries in 2015. In 2017, the company plans to
introduce the Gen-III, a mass-market electric car which is expected to have a
base price of $35,000.
Total electric vehicle and plug-in hybrid market size
Tesla aims to become a mass producer of electric vehicles. In order to
achieve that, there must be a large enough market. This is especially relevant

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