Tesla Motors (TSLA:NASDAQ) - On The Verge of
Changing Everything, But Questions Remain
August 1, 2014
By Chris Berry
Charging Ahead
Last week, TSLA released its Q2 2014 earnings. As a proponent of disruptive business
models and the raw materials necessary to enable the upheaval, I always listen with rapt
attention. The earnings of $0.11 per share on net income of $16 million (non-GAAP), and
a loss of $0.50 per share on net income of $62 million (GAAP) were enough to satisfy the
market and after a brief dip in after hours trading, the share price rebounded strongly.
As is the case with many of the early-stage companies I follow, I’m more interested in
production metrics, though revenue here is accelerating, indicating that TSLA is having
no problem selling its cars. I’m willing to tolerate negative earnings and cash flow as
long as the company is investing in future growth and increasing sales.
This is clearly the case with TSLA which reported record production (8,763 Model S)
and deliveries (7,579 Model S) in Q2 and is on track for more than 35,000 deliveries in
2014 with the stated goal of 100,000 deliveries by the end of 2015. Additionally, with a
Cap Ex guidance of $850 million, TSLA has a Cap Ex/Sales ratio of over 20% unparalleled in the automotive business according to the FT. The next closest is Jaguar at
12%. TSLA is clearly a company in its early growth phase.
Rather than dissect the numbers here, I think it’s important to look at the main takeaways
from the call and consider any questions that arise for the company as they continue on
an exciting journey to revolutionize the automotive and energy storage businesses.
I came away with two main questions from the call.
Key Takeaways and Subsequent Questions
The long-stated goal here is to be able to produce an EV at a price which the mass market
can afford. The conventional wisdom states that a price of $200/kWh is the minimum
cost at which this could become a reality. The need to lower the battery cost was the main
thrust behind the Gigafactory announcement and the recent news that Panasonic has
committed to a portion of the estimated $5 billion cost for the factory is welcome.
Source: Bloomberg New Energy Finance
The chart above shows the trend in battery cost from various sources and the $200/kWh
figure is in sight. Company management stated that 30% cost reduction in the battery
could be “conservative”, though this is partially dependent upon full production from the
Gigafactory, slated to commence in 2020. TSLA CEO Elon Musk also stated he foresees
a cost of $100/kWh within ten years – making EVs more than competitive with
traditional internal combustion engines.
Question #1: How to finance the Gigafactory?
This raises the first question yet to be answered from yesterday’s call: Based on what
Panasonic will commit to the Gigafactory and what TSLA will provide, how will the
remaining gap be filled? Other partners? State incentives? This could total up to $2 to $3
billion.
Regarding the investment, Musk said:
“Of that number, we see Tesla probably providing 40 to 50 percent of the total;
Panasonic probably about 30 to 40 percent; the state maybe 10 percent; and other
industrial partners maybe 10 to 15 percent, depending on how vertical we go with
the factory,”
With TSLA generating negative free cash flow (see below), if they are to raise the
remaining funds to construct the Gigafactory, how will they do this in as non-dilutive a
manner as possible?
Source: TSLA Q2 2014 Investor Letter
TSLA does have over $2.6 billion in cash on its balance sheet, but obviously can’t use all
of this to fund Gigafactory construction. With Wall Street still in love with the stock,
attaining capital shouldn’t be an issue, but minimizing dilution and optimizing the capital
structure is a very important issue to consider. Demand for the Model S or Model X isn’t
the issue here as Musk stated several times on the call that “We will not have a demand
issue.” That said, what the financing package for the Gigafactory looks like will be a key
issue going forward.
Question #2: An alternate battery chemistry was discussed on the call. Will this have implications
for raw materials demand?
During the earnings call, an analyst asked a question surrounding battery chemistry and
whether or not this would change to allow for further efficiencies and lower battery costs
per kWh. The answer was particularly interesting in that while the geometry of the
battery cell will change, so too will the chemistry. TSLA hopes to increase battery energy
density by 10 to 15%. Energy density is defined as the amount of energy stored in a given
system per unit mass or volume. Higher energy density helps lower the overall cost of the
battery when produced at scale. Company management on the call said that “chemistry
defines cost” and this is the key issue.
TSLA uses a battery chemistry known as NCA (nickel cobalt aluminum) in the Model S
where specific amounts and purities of various raw materials are all well known and are
integrated into the company’s existing supply chain. The allure of supernormal metals
demand from the Gigafactory has resuscitated numerous graphite and lithium junior
mining companies in recent months but it remains to be seen how this metals demand
will change based on slightly different chemistry – or whether or not it will change at all.
As an aside, TSLA isn’t the only company ramping up battery capacity in anticipation of
strong continued growth in vehicle electrification. This is important to keep in mind as
TSLA isn’t the “only game in town.” LG Chem (051910:KR) recently
announced plans (subscription req’d) to expand its own battery production capacity,
entering into a JV agreement to build a plant in China which will produce enough
batteries for 100,000 EVs by the end of 2015.
With or without the Gigafactory, demand for raw materials such as lithium, graphite, or
cobalt is set to increase – the only question is by how much. At risk of too much
hyperbole, it is important to remember that each metal has different supply and demand
characteristics and the long line of junior mining companies lined up to integrate into
global lithium ion supply chains will likely get demonstrably smaller in the coming years.
We can see below how much lithium is used in batteries, and this is with EVs (of all
types) comprising a miniscule overall percentage of the existing global auto fleet. There
is clearly a great deal of upside.
Source: Roskill
Takeaways
Despite TSLA’s reputation as a “momo” stock, the company’s vision is compelling and
becomes more believable with each milestone they hit. Ultimately vehicle electrification
is about much more than cars and TSLA is just one of a number of companies investing
in lithium ion battery capacity. Musk sees a run rate production of 100,000 Models S and
X combined by the end of 2015 which would more than double the 2014 projected
production of 35,000.
It is growth like this, plus energy storage development, solar photovoltaic adoption, and
emerging market growth with still color me optimistic on the future for select energy
metals despite the rut the junior mining space finds itself in.
TSLA’s stock price may or may not be rich depending upon your valuation model, but
the company itself serves as a valid case study of nascent success in a market where
many have failed before it.
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