Tesla's battery ambitions are significant for patient, medium-term investors

Tesla Inc’s (NASDAQ:TSLA) battery day event may not have been the blockbuster event on which many investors had pinned their hopes, but there were many ambitious ideas and significant moves on a medium-term timeline.   The big longer-term goals were laid out by founder and chief executive Elon Musk for 20mln cars, plus a 56% reduction of battery costs with 50% longer range, with the aim of developing a more affordable US$25,000 Tesla, all targeted within three years. However, there was nothing from Musk about hydrogen fuel cells, or fool cells as he has called them before, nor solid-state batteries, nor a specific target for cost reduction in dollars per kilowatt-hour, nor was anything actually tangible, as an analyst at Roth Capital complained. The stock fell 6% on Wednesday but many less impatient observers were impressed, though. Deutsche Bank upgraded Tesla to ‘buy’ from ‘hold’, saying the Battery Day “showcased impressive trajectory for its technology, capacity and cost, which should help accelerate the world’s shift to electric vehicles and extend Tesla’s lead considerably”. Analysts at Jefferies felt the development of a new, larger battery and some of the industry trends laid out by Musk were “more ambitious than expected” and was “confirmation of Tesla's battery edge and better clarity on manufacturing ambitions that challenge industry practice – in process and investment cost”. ‘Tabless’ battery round the corner While a lack of immediacy may be a disappointment to some, a new battery technology was the closest to being tangible, or “close to working” as was said in the presentation. This new ‘4680’ battery cell, named because it is 46mm in diameter by 80mm tall, is able to produce six times more power and 16% additional range, with a manufacturing facility expected to be producing 10 gigawatts of batteries within 12 months. Production of this ‘tabless’ battery, called so as it removes the tab element from a battery cell and so should allow lower manufacturing costs and improve power and range, has already begun, it was revealed, but kinks still need to be ironed out in the next 12 months. Road to mass EV adoption The Jefferies analysts said 18-36 months time frame to accrue 56% savings in dollars per kilowatt hour “looks logical”. This would still allow Tesla to maintain its “battery edge”, Jefferies said, and enable the launch of the planned US$25,000 vehicle by 2023 at parity to an internal combustion engine car.  Broker Liberum was also sanguine, saying the event “can best be described as an ambitious vertical integration scale-up plan” or “an attempt to take ownership of more of the EV ecosystem and drive down costs”. Deutsche Bank’s analysts estimate that achieving an average battery cost of even just $65 per kWh by 2025 would boost gross profit margins to mid-30% on Tesla SR+ Model 3s and Model Y. This would enable Tesla to sell very large volumes of the newly-announced US$25,000 “Model 2” at “respectable circa 20% margin”, which could prompt mass adoption even without government support. Tesla should now be able to deliver 2mln-plus vehicles and generate US$15 earnings per share by 2025, according to Deutsche’s new forecasts, up from 1.4mln vehicles and EPS of US$12.25 previously after incorporating lower battery costs and higher volumes.  This resulted in a price target hiked to US$500 from US$400.  “With the stock price indicated down post market as traders “sell the news”, we recommend longer-term investors take advantage of weakness to buy Tesla as the best way to invest in vehicle electrification,” the Deutsche analysts said. No mention of solid state and hydrogen On the absence of developments of an anticipated one-million mile battery, “who needs something that can live for more than 50 years, in our view”.  It was notable that Musk did not mention solid-state batteries, where the solvent liquid electrolyte is replaced with a solid material that can also act as the separator, which potentially offer six-times-faster charging and almost double the energy density. But Liberum said this was probably not mentioned as it is not likely within three years. Something to look forward to in the next Battery Day.