Tesla Motors (NASDAQ:TSLA) hit a record high for its stock price late in February but has been down about 16% during March. The stock price was driven downwards by many issues the company had to face regarding its Giga Factory and NHTSA investigations into the battery fires. The purpose of this article is to look into the situation and evaluate whether Tesla is a stock worth investing in.
Rising Risks for Tesla's Giga Factory
Tesla had announced in February of this year that it would double the worldwide production of Li-ion batteries on a standalone basis with its Giga Factory. Panasonic Corporation (OTCPK:PCRFY), the primary battery supplier to Tesla for its Model S, was an anticipated partner for its Li-ion battery factory ever since the project was announced. Now Panasonic claims this huge project is way more risky than its current partnership with Tesla and therefore has not yet committed to an investment in Tesla's battery plant. If Panasonic had agreed to the strategic partnership with Tesla with regards to the battery factory, things would have been easier for Tesla as it would be able to get access to Panasonic's supply chain. Non-committal commentary from Panasonic has raised concerns regarding the financial viability of the project. Since Tesla had announced it would invest $2 billion for the $4-$5 billion project that means Tesla needs to get some partners on board who are willing to finance the rest of the project. Elon Musk (CEO of Tesla) had mentioned on Bloomberg that he will be working with some partners on this project and that Panasonic was the only option mentioned by name. Panasonic, however, has not voiced its commitment and other likely partners have yet to voice their stance regarding the project. As I mentioned in my previous article, the completion of the Giga Factory is a big issue and before one can believe in the benefits it will bring to the company and consequently to the shareholders, a proper analysis must be conducted.
Although the Giga Factory will enable Tesla to produce 500,000 vehicles by 2020 and enable it to meet its growing demand, Tesla is facing some challenges on its supply chain front. Some of the challenges the company is facing are the procuring of enough battery making materials at a price that can help the company produce batteries at the lowest possible cost. The lithium ion battery used in Tesla cars uses graphite for the formation of anodes and a recent report by Bloomberg related the auto maker's consumption of graphite to the dirty rain in China. This is because China is a major producer and processor of natural graphite and its synthetic version. As a response to the report, Tesla's spokeswomen has clarified Tesla's position by announcing that the company aims to see North America as the only source for raw materials of its proposed battery factory. This way Tesla will successfully avoid the costs and pollution caused by moving necessary raw materials from miners to processors and then to end consumers. Moreover, the battery factory will provide jobs to 6500 people, will span over 1000 acres, and the operations will be powered by electricity made by solar and wind farms on site. Hence Tesla will bring supply chain transparency to its operations along with working in a more socially responsible manner. The actual concern will be whether North America is in itself sufficient to meet the needs of Tesla's Giga Factory as it is claimed to have a capacity of 50 GWH. An electric vehicle battery needs more graphite than batteries in other rechargeable devices as illustrated in the table below.
On one hand, demand for rechargeable batteries and consequently graphite is on the rise but on the other hand China's crackdown against graphite mines and processors can lead the graphite prices to record high levels. However, analysts expect rising prices of graphite will not affect vehicle prices but will undoubtedly raise battery prices. This way Tesla's aim to cut down its battery cost by 30% becomes ambiguous once again. Currently, Tesla uses synthetic graphite from Europe and Japan not from China and therefore can't be blamed for the rising air pollution concerns in China. Tesla aims to cut the per kilowatt hour cost of its battery pack by 30% by 2017 and one way of achieving this may be the procurement of natural graphite rather than the synthetic version that costs double. North America's largest graphite mine has the potential to become world's largest and richest graphite mine and is being developed by Graphite One Resources since January 2013. Tesla may have to procure graphite from Canada where graphite mines have yet to be built but for other raw materials such as cobalt, Canada cannot fulfill Tesla's needs. Currently Tesla sources its cobalt from the Philippines and although the Democratic Republic of Congo is a major miner of cobalt, its war-ravaged status is the reason why Tesla does not use it as a source. Formation Metals Inc. (FMETF) is developing a cobalt mine in Idaho that could become a potential source for Tesla. According to the company, spokesperson Rich Honsinger, Formation has plans to offer its ethically sourced cobalt to Tesla. If the electric car manufacturer agrees to source its cobalt from Formation, we may see Formation as the potential supplier of Cobalt to Tesla.
In terms of lithium, an irreplaceable element in Tesla's current stock price, there is no issue of scarcity rather it is the price appreciation year over year that is the real matter of concern. In fact lithium is facing an oversupply around the globe but if the Giga Factory project comes to fruition and runs at full capacity (15,000-25,000 tons of lithium carbonate annually) Tesla alone will be soaking in 17% of the global lithium supply. On average, lithium prices have increased 5% - 10% annually and this variance is something Tesla can't control. In essence, Tesla needs to be very careful in procuring the resources and at the cheapest possible price to help the company mass market its vehicles with an affordable price tag by 2017.
Tesla's Preventive Measures after NHTSA Probe Ended
Three of Tesla's Model S sedan caught fire on the road and that caused the NHTSA (National Highway Traffic Safety Administration) to investigate the company but later on the probe came to an end with no defect trend found. In response, Tesla is adding a titanium shield and two defector plates beneath the battery of its Model X luxury car to make the vehicle even more robust in terms of security. These added features will be part of any car built after March 6th and previously manufactured cars will be upgraded for free if the owner wishes so. This move by the company will definitely bring peace of mind to those who own the model or wish to buy one and will also enhance the credibility of Tesla's brand. Tesla's stance is commendable when compared to General Motors' (NYSE:GM) stance regarding its faulty ignition switches.
Expansion in China
While Tesla is actively seeking opportunities to strengthen its foothold in China, the world's largest auto market, its general manager in China has left the company. General Manager Kingston Chang had joined the company a year ago and it is said that he resigned due to personal reasons. Tesla has attached high hopes to the expansion in China, a country that is concerned with rising air pollution. China has set a target of having 5 million vehicles powered by alternative energy by 2020 but lack of proper infrastructure, charging stations, and high costs of electric vehicles have proved to be a hindrance. Although Tesla is trying to get its Model S qualified for China's electric car subsidies, its car has a price tag of $118,000 inclusive of taxes and import duties in China that is 1.5 times of the car's price in USA (before federal tax credits). Tesla aims to match China sales to that of the US by next year and in order to bring this plan to fruition it needs to get over its personnel problem as soon as possible to avoid any sort of disruption. It has been taking orders for the Model S Sedan since August last year and has also opened a store in Beijing showcasing the company's vehicles.
Tesla has to deal with some issues regarding its supply chain management and hopefully it will deal with it in an intelligent manner like the way it handled the NHTSA investigations and New York sales issues, leading to the stock rebounding. Tesla's Giga Factory is an idea that can revolutionize battery production around the globe. Even if Panasonic is not ready to partner with Tesla on this occasion, Tesla will eventually find someone who is a risk taker that can provide financing for the project. Although this handwringing may block the way for the stock price to increase, hopefully it will prove to be temporary. Therefore even in such circumstances I will recommend investors remain bullish on Tesla for the long term. The current stock price dip seems to be an attractive opportunity for investing in the stock. Investors and customers of Tesla can be rest assured that they are dealing with a socially responsible company that can change the dynamics of businesses with its decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.