Tesla's first-quarter results indicate downward pressure on its strong EBITDA margins, which remain in the low end of our expected range. Due to multiple price cuts across its global product portfolio, we now expect the company's EBITDA margins will be about 18%, which is at the low end of the 18%-21% range we previously forecast for 2023. In our view, this level remains considerably stronger than the margins of most of its automotive peers, supporting Tesla's efforts to protect its solid electric vehicle (EV) market share amid intensifying competition and aggressive launches by competitors globally. Despite the price cuts, we anticipate the company will maintain EBITDA margins of more than 15% (which is in the top quartile of our EBITDA margin estimates for global automakers in 2023 and 2024) over the next two years, which will provide it with a cushion relative to our downgrade threshold at the current rating. We view Tesla's pricing actions as an important lever to protect its market share as it looks to reduce the total cost of EV ownership. In addition, the pace of Tesla's production growth and the manufacturing efficiency of its Austin and Berlin facilities (with no material cost overruns) appear to be in line with our expectations, as evidenced by the improved cost optimization of its new 4680 cell manufacturing in Austin.
Tesla's high growth capital expenditure (capex) will pressure its free operating cash flow (FOCF), though we estimate it will remain in line with the 'BBB' rating. We now expect FOCF to sales of over 5% over the next two years, which compares with our prior expectation of closer to 10%. However, this level remains favorable relative to our median cash flow forecasts for other investment-grade rated automakers (see Chart 1). The company will likely incur high capex ($6 billion-$8 billion in 2023 and $7 billion-$9 billion each year in 2024 and 2025) to support the ongoing global expansion of its factories, including its cell production. Our reduced FOCF forecast also incorporates our more conservative estimate of its margins following its recently announced price cuts. With over $22 billion in cash and cash equivalents as of March 31, 2023, in addition to our estimated FOCF, we believe Tesla will maintain liquidity well above our established threshold (auto cash balances of roughly 15% of sales) for Ford Motor Co. and General Motors Co. (two peers that are also contending with industry cyclicality). With more cash on its balance sheet than total debt, it appears that Tesla will easily be able to fund its global expansion while navigating the uncertain macroeconomic conditions globally, including a mild recession in the U.S., stagnant economic conditions in Europe, and more volatile auto demand in China.
Ratings Score Snapshot
Recent Research
- Global Auto Sales Forecasts: Macro Risks Demand Pricing And Production Discipline, April 18, 2023
- Industry Top Trends 2023: Autos, Jan. 23, 2023
- Credit FAQ: How Will The Electric Revolution Impact The Credit Quality For The Global Auto Industry? , Oct. 20, 2022
- Research Update: Tesla Inc. Upgraded To 'BBB' From 'BB+' On Improving Production And Solid Cash Flow Prospects; Outlook Stable, Oct. 6, 2022
Company Description
Tesla is the world's leading manufacturer of fully electric vehicles and a major producer of energy generation and storage systems. In 2022, the company had an overall market share across the global light vehicle market of 1.7%, according to S&P Global Mobility, with revenue of over $80 billion.
Outlook
The stable outlook reflects our expectation that Tesla will maintain low debt levels as it sustains its solid market share, profitability, and strong liquidity amid an increasingly competitive environment for EV sales.
Downside scenario
We could lower our ratings if:
- Tesla adopts a more aggressive financial policy with respect to its shareholder distributions, the expansion of its captive finance operations or other business segments, and acquisitions that materially reduce its financial cushion; or
- It is unable to sustain solid FOCF due to slowing growth or higher-than-expected spending.
Upside scenario
We could raise our ratings if:
- Tesla sustains its first-mover advantage as EV demand expands and competition intensifies such that it appears likely its global light vehicle market share will exceed 5%;
- We believe it will likely sustain its recent FOCF track record beyond 2024; and
- It remains committed to a prudent financial policy in line with a higher rating.
Key Metrics
| Tesla Inc.--Key Metrics* | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020a | 2021a | 2022a | 2023e | 2024f | ||||||||||
| Vehicle Sales (thousands of units) | 500 | 936 | 1,321 | 1,800-2,000 | Greater than 2,000 | |||||||||
| EBITDA margin (%) | 20.6 | 22.8 | 24.5 | 17-19 | Greater than 15 | |||||||||
| FOCF to sales (%) | 9.7 | 10.3 | 10.1 | 5-7 | Greater than 5 | |||||||||
| *All figures adjusted by S&P Global Ratings. a--Actual. e--Estimate. f--Forecast. FOCF--Free operating cash flow. | ||||||||||||||
Financial Summary
| Tesla, Inc.--Financial Summary | ||||||
|---|---|---|---|---|---|---|
| Period ending | Dec-31-2017 | Dec-31-2018 | Dec-31-2019 | Dec-31-2020 | Dec-31-2021 | Dec-31-2022 |
| Reporting period | 2017a | 2018a | 2019a | 2020a | 2021a | 2022a |
| Display currency (mil.) | $ | $ | $ | $ | $ | $ |
| Revenues | 11,759 | 21,461 | 24,578 | 31,536 | 53,823 | 81,462 |
| EBITDA | 692 | 2,525 | 3,456 | 6,501 | 12,283 | 19,965 |
| Funds from operations (FFO) | 259 | 1,977 | 2,839 | 5,815 | 11,314 | 18,433 |
| Interest expense | 655 | 795 | 793 | 875 | 513 | 368 |
| Cash interest paid | 366 | 513 | 563 | 571 | 408 | 329 |
| Operating cash flow (OCF) | (50) | 2,216 | 2,723 | 6,267 | 11,982 | 15,345 |
| Capital expenditure | 3,956 | 2,265 | 1,406 | 3,194 | 6,461 | 7,119 |
| Free operating cash flow (FOCF) | (4,006) | (49) | 1,317 | 3,073 | 5,521 | 8,226 |
| Discretionary cash flow (DCF) | (4,268) | (276) | 1,006 | 2,865 | 5,360 | 8,069 |
| Cash and short-term investments | 3,368 | 3,686 | 6,268 | 19,384 | 17,707 | 22,185 |
| Gross available cash | 3,368 | 3,686 | 6,268 | 19,384 | 17,707 | 22,185 |
| Debt | 11,304 | 13,188 | 14,697 | 0 | 0 | 0 |
| Common equity | 5,632 | 6,314 | 8,110 | 23,679 | 31,583 | 45,898 |
| Adjusted ratios | ||||||
| EBITDA margin (%) | 5.9 | 11.8 | 14.1 | 20.6 | 22.8 | 24.5 |
| Return on capital (%) | (10.7) | (1.4) | 0.5 | 9.0 | 24.2 | 36.5 |
| EBITDA interest coverage (x) | 1.1 | 3.2 | 4.4 | 7.4 | 23.9 | 54.2 |
| FFO cash interest coverage (x) | 1.7 | 4.9 | 6.0 | 11.2 | 28.7 | 57.0 |
| Debt/EBITDA (x) | 16.3 | 5.2 | 4.3 | 0.0 | 0.0 | 0.0 |
| FFO/debt (%) | 2.3 | 15.0 | 19.3 | NM | NM | NM |
| OCF/debt (%) | (0.4) | 16.8 | 18.5 | NM | NM | NM |
| FOCF/debt (%) | (35.4) | (0.4) | 9.0 | NM | NM | NM |
| DCF/debt (%) | (37.8) | (2.1) | 6.8 | NM | NM | NM |
Peer Comparison
| Tesla, Inc.--Peer Comparisons | |||||
|---|---|---|---|---|---|
| Tesla Inc. | General Motors Co. | Ford Motor Co. | Stellantis N.V. | Volkswagen AG | |
| Foreign currency issuer credit rating | BBB/Stable/-- | BBB/Stable/-- | BB+/Positive/B | BBB/Stable/A-2 | BBB+/Stable/A-2 |
| Local currency issuer credit rating | BBB/Stable/-- | BBB/Stable/-- | BB+/Positive/B | BBB/Stable/A-2 | BBB+/Stable/A-2 |
| Period | Annual | Annual | Annual | Annual | Annual |
| Period ending | 2022-12-31 | 2022-12-31 | 2022-12-31 | 2022-12-31 | 2021-12-31 |
| Mil. | $ | $ | $ | $ | $ |
| Revenue | 81,462 | 143,975 | 149,079 | 191,246 | 237,922 |
| EBITDA | 19,965 | 14,584 | 10,406 | 25,385 | 26,104 |
| Funds from operations (FFO) | 18,433 | 13,235 | 8,767 | 21,157 | 21,710 |
| Interest | 368 | 1,099 | 1,313 | 1,449 | 2,633 |
| Cash interest paid | 329 | 982 | 1,254 | 1,203 | 608 |
| Operating cash flow (OCF) | 15,345 | 15,974 | 12,678 | 15,543 | 27,516 |
| Capital expenditure | 7,119 | 9,194 | 6,808 | 5,515 | 11,850 |
| Free operating cash flow (FOCF) | 8,226 | 6,780 | 5,870 | 10,028 | 15,667 |
| Discretionary cash flow (DCF) | 8,069 | 1,762 | 3,377 | 5,457 | 11,339 |
| Cash and short-term investments | 22,185 | 27,298 | 32,184 | 48,523 | 70,804 |
| Gross available cash | 22,185 | 27,298 | 32,184 | 47,350 | 49,093 |
| Debt | 0 | 4,173 | 0 | 0 | 21,394 |
| Equity | 45,898 | 56,374 | 31,290 | 69,639 | 114,972 |
| EBITDA margin (%) | 24.5 | 10.1 | 7.0 | 13.3 | 11.0 |
| Return on capital (%) | 36.5 | 12.1 | (8.6) | 32.7 | 9.1 |
| EBITDA interest coverage (x) | 54.2 | 13.3 | 7.9 | 17.5 | 9.9 |
| FFO cash interest coverage (x) | 57.0 | 14.5 | 8.0 | 18.6 | 36.7 |
| Debt/EBITDA (x) | 0.0 | 0.3 | 0.0 | 0.0 | 0.8 |
| FFO/debt (%) | NM | 317.1 | NM | NM | 101.5 |
| OCF/debt (%) | NM | 382.8 | NM | NM | 128.6 |
| FOCF/debt (%) | NM | 162.5 | NM | NM | 73.2 |
| DCF/debt (%) | NM | 42.2 | NM | NM | 53.0 |
Environmental, Social, And Governance
Environmental factors are a positive consideration in our credit rating analysis of Tesla. The company has an advantage over its competitors due to its battery and powertrain technology, the superior range per kilowatt hour (as rated by the U.S. Environmental Protection Agency) of its vehicles compared with upcoming launches from competitors, and its lack of internal combustion engine vehicles, which are facing increasing scrutiny from regulators globally.
Governance is a moderately negative consideration, which reflect past securities fraud charges by the SEC and its historically high rate of senior executive turnover, albeit more limited in the last couple of years. Despite comprehensive corporate governance and other reforms at Tesla, we view its key person risk as very high, given Elon Musk's dominant role.
Social risks are currently a neutral influence but could intensify in the next decade because potential accidents, autopilot underperformance, fires, headline risk, and cybersecurity breaches could increase the risk of product liability, government scrutiny, and further regulation. Until those risks subside, we believe Tesla's progress toward improving passenger safety by successfully deploying its autopilot technology will, at best, remain credit neutral.
| Rating Component Scores | |
|---|---|
| Foreign currency issuer credit rating | BBB/Stable/-- |
| Local currency issuer credit rating | BBB/Stable/-- |
| Business risk | Satisfactory |
| Country risk | Low |
| Industry risk | Moderately High |
| Competitive position | Satisfactory |
| Financial risk | Modest |
| Cash flow/leverage | Modest |
| Anchor | bbb+ |
| Diversification/portfolio effect | Neutral (no impact) |
| Capital structure | Neutral (no impact) |
| Financial policy | Neutral (no impact) |
| Liquidity | Strong (no impact) |
| Management and governance | Fair (no impact) |
| Comparable rating analysis | Negative (-1 notch) |
| Stand-alone credit profile | bbb |
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
| Primary Contact: | Nishit K Madlani, New York 1-212-438-4070; nishit.madlani@spglobal.com |
| Secondary Contact: | David Binns, CFA, New York 1-212-438-3604; david.binns@spglobal.com |
| Research Contributor: | Suraj Rajani, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai ; |
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