BCO224 Financial Markets

Introduction

Tesla is known for implementing cutting edge innovation and technological prowess in its operations. The company is committed for manufacturing electric vehicles which are proven to be more successful than the gasoline cars. The vision of Tesla to progress toward zero-emission is a far-sighted for a better future (Tesla.com. 2021). Despite of the company’s effort to establish itself as a distinguished automaker in the hypercompetitive automobile sector, it suffers from limited global presence. In other words, the current issue in the business is evident with its restricted effort for expansion (Sieklucki 2018). The succession strategy is also a setback for the company. Tesla has established itself as a premium service provider for clean energy brand. However, the high price for such premium services is often seen with setbacks among the customers in terms of affordability and also to a great extent the consumers are yet to fully trust the reliability of electric vehicles (Abdelwahed, Chorfi and Malek 2020).

Some of the other emerging issues are evident with manufacturing complications which was witnessed in the launch of Model X. Moreover, as a result of following complicated and highly experimental procedures, there always remains a chance of the company facing unbalanced demand and supply for adhering to the production requirements (Tenhundfeld et al. 2019). Furthermore, the high volume of production always creates the problem of increasing cost of sales, which compels Tesla to target customers based on market skimming strategy. Lastly, the sales of energy storage systems and electric vehicles is susceptible to shortage of batteries (Haji and Slocum 2019). The memo provides the recommendation for the management based on the trend of the stock prices of the company during the last four months and three weeks. In this regard, the assertions of the memo include an increase or decrease in the stock price of Tesla during the aforementioned period (Nie et al. 2018).

Trend In Stock Price During The Last 4 Months

The monthly stock price analysis of Tesla has been conducted by considering the stock price listed in YahooFinance from October 2020 to March 2021.This information is used for computing the percentage change in the stock prices during the last four months i.e., from November 2020 to February 2021. A line graph has been used to illustrate the increase or decrease in the stock price.

Trend In Stock Price During The Last 3 Weeks

The weekly analysis is conducted from 15/02/2021 to 08/03/2021. The pictorial representation of increase or decrease in the stock price has been stated with the use of line graph similar to the analysis performed on a four-month time span for stock prices of Tesla. The last three months interpretation for the company suggests that the stock prices have increased from -13.54% during the last week of February 2021 to the first week of March 2021. The historical stock price information has been also collected from YahooFinance alike the four months data.

Explanation Of The Observed Trends

The monthly trends in the last four months shows a change of 46.27% in November 2020, 24.33% in December 2020, 12.45% in January 2021 and -14.87% in February 2021. In this manner, it can be determined that despite of the increase in the stock price during the end of 2020, the abysmal trend is evident in February 2021. However, in order to get a clearer picture of the stock price trend, a three-month interpretation has been performed which represents an increasing growth. Based on the illustration of the line graph, the three-month analysis displays 11.73% increase in the stock price at the end of the first week in March 2021. The progressive increase in the stock price of the company during last week shows signs of improvement in the stock price of Tesla (Finance.yahoo.com 2021).

Relating The Trends With The Contextual Information

As per the contextual information published in the economic times, there has been an increase of 14% in the stock price from 8^th March 2020 to 9^th March 2020. Such an increase is mainly seen as a repercussion of the upsurge in the sales in China. This sale has been conducive in improving the rating of the company in terms of sales of electric car. Tesla’s sales in China increased from 15484 in January to 18318 in February (Jing 2020). In addition to this, it has contributed to over $75 billion to the market capitalization of the company. In comparison to Ford, the market capitalisation is depicted as $37B and $50B for General Motors. Such an increase in the market capitalisation resembles the increase in stock price of $643 in March 24,2020 (Perkins and Murmann 2018).

The second most important contextual information relates to increasing GDP of the US from 18238.3B in 2019 to 19542.98 in 2020. Moreover, as per the GDP prediction by Statista, the GDP of the US is expected to increase to 24833.76B by 2025 (Statista.com. 2020; ŠuleÅ™ and Vrbka 2021). The positive economic environment also attributes to the overall growth in the stock prices of Tesla. The third most important factor in a favourable increase in the financial performance is due to its launch of the Model 3 in 2019. This is in response to the increased appeal of the vehicle among larger audience. Soon after the launch of this model, the demand increased from 146000 in 2018 to 301000 in 2019. Along with this, the positive free cash flow is one of the main reasons for rise in the P/E ratio of the company, which in turn has positively impacted its stock price performance. In other words, based on the positive free cash flow of $872 during 2019, the investors have predicted the stock to be on the higher side. This is possible due to Tesla’s initiative for improving economies of scale with increasing production (Buus 2020).

Forecasting The Changes In The Price For Next Month

The forecasted growth as per the monthly stock analysis has further shown a negative trend. This is due to the fact that the analysis is based on a monthly forecast. As previously mentioned, the weekly analysis gives a clearer picture of the improving stock performance in the recent times. Despite of such a decrease, the contextual information shows some signs of improvement in the next month’s forecast of the stock prices of Tesla (Strauss and Smith 2019). Some of the other contextual supporting information suggests that Tesla has ambitious plans for 2021 by launching its Model Y which is designated to be the safest vehicle featuring a low centre of gravity, unparalleled protection, large crumple zones and rigid body structure (Roper 2020).

Recommendation

The important aspects of recommendation for the management of the company are based on expansion of sales in other regions, reducing the cost of manufacturing, reducing the selling price, incorporating better its production technologies within own premise of the company and introduction of the pickup truck service. Along with this, the analysis conducted by Motley Fool has revealed that the stock of Tesla is not among the 10 best stocks for investors despite of its promising performance in the recent times (Sparks .2020). As per the information assessed for the monthly and weekly stock prices, it is recommended for the company to follow a liberal policy in terms of the implementation of the new innovations in the company. Additionally, there is sufficient scope for further investment in new expansion policies. There are several opportunities for Tesla to better implement decisions related to management structure, strategic growth and performance of the business. It is further recommended to make the relevant improvements in the area related to sales expansion and untapped areas of the market. This can be mainly done in the Asian region where the market is seen to be unsaturated especially in renewable energy and the automotive sector.

The emphasis on global market expansion for the company will be conducive to increase its market presence and increase financial stability. In terms of financial stability, Tesla can aim to decrease the cost of sales, especially in the areas of automotive leasing and automotive sales. This is evident with the increase in the automotive cost of sales from $13686 in 2018 to $15939 in 2019. The total increase in the cost of sales for Tesla can be seen with $17419 in 2018 to $20509 in 2019.  The financial problem in Tesla is also seen to be evident with a decrease in the gross profit margin from 19% in 2018 to 17% in 2019. In this regard, there is sufficient scope for Tesla to increase the sales by reducing the selling price. This will be able to provide a significant opportunity for the company for solving the issue of increasing cost of sales. As per the increasing economies of scale, the management should be more confident in funding its operations and continue its state of growth to the point of being self-funded.

Conclusion

The current business problems in Tesla are evident with limited presence, higher prices, manufacturing complications, increasing cost of sales and sales getting influenced by a shortage of batteries. The monthly stock price in the performance shows how the stock has performed poorly during February 2021. Nevertheless, three-month interpretation counters such assertions and shows how it is gradually increasing since the end of the first week in March 2021. The reasons identified based on the contextual information can be seen with increase in the sales in China and increasing GDP of the US from 18238.3B in 2019 to 19542.98 in 2020. Additionally, such an assertion is supported by a positive increase in the financial performance due to its launch of the Model 3 in 2019. Lastly, positive free cash flow of $872 during 2019 suggests optimum utilisation of economies of scale for increasing production. As per the understanding of contextual information and trends in stock price, the forecasted change in the stock price performance for the next month has been depicted with a negative trend. However, the factors identified in the context of information along with Tesla’s launching of Model Y have shown some promising signs of improvement in the stock performance later in the month. The recommendations are mainly based on following a liberal policy for incorporating new innovations in the company. Tesla should also look forward to expand its operations in Asian countries to explore its untapped potential. It is also recommended to the management for decreasing the cost of sales in the areas of automotive sales and automotive leasing. Lastly, Tesla should focus on improving its gross profit margin by utilising its strength of economies in scale.

References

Abdelwahed, M., Chorfi, N. and Malek, R., 2020. Reconstruction of Tesla micro-valve using topological sensitivity analysis. Advances in Nonlinear Analysis, 9(1), pp.567-590.

Buus, T.,2020. P/E, dividend yield and GDP growth in USA: The story of stock market valuation1. Financial Management of Firms and Financial Institutions, p.151.

Finance.yahoo.com 2021. Tesla, Inc. Available at: https://finance.yahoo.com/quote/TSLA/history?p=TSLA (Accessed: 12 March 2021).

Haji, M.N. and Slocum, A.H., 2019. An offshore solution to cobalt shortages via adsorption-based harvesting from seawater. Renewable and Sustainable Energy Reviews, 105, pp.301-309.

Jing, X.U., 2020. Analysis of the Operation Strategy of Tesla Inc. in China. Frontiers in Economics and Management Research, 1(1), pp.21-25.

Nie, S., Liu, L., Du, Y. and Zhang, W., 2018. Over-the-air: How we remotely compromised the gateway, BCM, and autopilot ECUs of Tesla cars. Briefing, Black Hat USA.

Perkins, G. and Murmann, J.P., 2018. What does the success of Tesla mean for the future dynamics in the global automobile sector?. Management and Organization Review, 14(3), pp.471-480.

Roper, L.D. 2020. Users’Manual, T.M.Y. Tesla Model Y.

Sieklucki, G., 2018, June. An investigation into the induction motor of tesla model s vehicle. In 2018 International Symposium on Electrical Machines (SME) (pp. 1-6). IEEE.

Sparks, D. .2020. 5 Factors Behind Tesla's Soaring Stock Price | The Motley Fool, The Motley Fool. Available at: https://www.fool.com/investing/2020/01/15/5-factors-behind-teslas-soaring-stock-price.aspx (Accessed: 12 March 2021).

Statista.com. 2020. United States - Gross domestic product (GDP) 2025 | Statista (2021). Available at: https://www.statista.com/statistics/263591/gross-domestic-product-gdp-of-the-united-states/ (Accessed: 12 March 2021).

Strauss, N. and Smith, C.H., 2019. Buying on rumors: how financial news flows affect the share price of Tesla. Corporate Communications: An International Journal.

ŠuleÅ™, P. and Vrbka, J., 2021. GDP Development of China and USA in terms of mutual sanctions and COVID-19. In SHS Web of Conferences (Vol. 92). EDP Sciences.

Tenhundfeld, N.L., de Visser, E.J., Haring, K.S., Ries, A.J., Finomore, V.S. and Tossell, C.C., 2019. Calibrating trust in automation through familiarity with the autoparking feature of a Tesla Model X. Journal of cognitive engineering and decision making, 13(4), pp.279-294.

Tesla.com. 2021. About Tesla. Available at: https: https://www.tesla.com/about (Accessed: 12 March 2021).

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