Introduction
Tesla is known for its commitment to developing electric vehicles and renewable energy solutions. The company has heavily invested in research and development to innovate in the electric vehicle industry, as well as in energy storage and solar technology. Such an assessment, in the form of considering various scenarios, is an integral part of business, even when significant uncertainty surrounds relatively new technologies that have not yet become widely used.
This paper assesses Tesla’s recent, substantial, and long-term $3.6 billion investment in the power and production of its new Semi truck, which includes opening a new facility in Nevada (Ohnsman, 2023). The analysis uses accurate option evaluation and a binomial pricing model, including net present value calculation under various scenarios. It is worth noting that all figures used are from official sources and are estimates, subject to many potential assumptions.
Background
Tesla has a similar track record of running large factories to produce electricity, which is then delivered to electric vehicle charging stations to form an accessible network for consumers. As a leader in the production of such batteries, thanks to the Gigafactory, which was implemented through several investors and government support as part of the vector of development of a sustainable and environmentally friendly transportation system in the United States, the company has no problems implementing such projects (Cooke, 2020; Ohnsman, 2023).
Although the organization has only recently started turning a net profit, its long-term investments aim to increase profits through extensive R&D capabilities in the nascent electric car market, where all competitors are also seeking solutions (Macrotrends, 2024). Tesla’s advantage lies in its contribution to infrastructure through charging stations, which do not require outsourcing services but, on the contrary, create space for receiving orders from competitors. However, several external factors and a high degree of uncertainty create specific concerns that can be realized by analyzing scenarios and financial activity.
Analysis
This paper examines two potential scenarios that lead to rapid or slow sales growth, potentially delaying the project’s payback. Given the general vector of state-driven development and the trend toward electric vehicle adoption, this work sets the probability of an optimistic scenario to 0.6 each year. On the other hand, the current high key rate and tight monetary policy by historical standards, coupled with high inflation, may make it difficult to achieve this goal due to the reduced purchasing power of end consumers and more complex lending (Trading Economics, 2024a, 2024b). Consequently, the adverse scenario was taken with a probability of 0.4.
Cash flows were generated based on Tesla’s current financial statements; potential profits were calculated using relative information on electricity gains and Semi sales targets, while gross and operating expenses were based on data on the new 3,000 employees and similar adaptations using relative indicators. The company’s average annual sales growth over the past three years has been approximately 32% (Macrotrends, 2024). Considering that current investments will generate approximately 116% more energy than currently available, combined with Semi production, in an optimistic scenario, sales growth is expected to be at the level of the best dynamics in the last three years, 48% per year (Ohnsman, 2023).
In the pessimistic scenario, the minimum increase over the past year is set at 19%, while expenses grow by 32% across all scenarios. It has been assumed that the plant will begin operating at the end of 2024 for the convenience of calculations based on currently available financial indicators. The discount rate for calculating NPV was set at Tesla’s WACC level of 9.4% (AlphaSpread, 2024). As a result, the following cash flows were generated for the next three years using the binomial option model scheme presented in Figures 1 and 2.
As shown in these figures, the NPV is positive in 7 out of 8 scenarios, demonstrating the project’s profitability in 93.6% of cases, according to the accepted probability. This indicator is only harmful when revenue grows by 19% annually, even though expenses increase by 32% due to higher maintenance and production costs. Accordingly, accepting the project is the most advantageous alternative despite the minimal risk of losses.
Postponing a project for a certain period carries greater reputational risks and a potential loss of market share if a competitor, taking advantage of government support, can occupy a similar niche and seize control of the infrastructure. The abandonment of the project underscores the need for the company to search for new solutions for expansion, which may currently be limited in other operational areas, such as space.
Conclusion
In this paper, Tesla’s current initiative to build a new battery plant and Semi trucks was analyzed using the binomial option model tool. With several assumptions, the analysis showed that this project is profitable with a high probability, carries minimal risk, and that the board’s decision to accept this initiative over the alternatives of waiting and refusing was appropriate.
The potential benefits are not just financial: the company is one of the pioneers of the government-backed goal of building a sustainable electric vehicle transportation system. It has the opportunity to capture not only the car market but also the infrastructure market through charging station services. Any delay in this actively developing industry is disastrous, given the strong interest of many competitors and the availability of government subsidies.
References
AlphaSpread. (2024). TSLA discount rate.
Cooke, P. (2020). Gigafactory logistics in space and time: Tesla’s fourth gigafactory and its rivals. Sustainability, 12(5), 2044.
Macrotrends. (2024). Tesla Financial Statements 2009-2023 | TSLA.
Ohnsman, A. (2023). Tesla Pouring $3.6 billion into Nevada plant for EV battery, Semi production. Forbes.
Trading Economics. (2024a). United States Fed Funds Interest Rate.
Trading Economics. (2024b). United States Inflation Rate.