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Tesla And The Price Of Utopia

|Includes: Tesla, Inc. (TSLA)

Yesterday, a new Morgan Stanley analyst report helped propel TSLA stock to all-time highs (the timing of this report by itself is a noteworthy "coincidence", more on this later.)

What's the gist of this report:

What's the price of utopia? Thanks to Morgan Stanley analyst Adam Jonas, we know: It's $320 a share. That's his new target for shares of Tesla Motors, Inc. , representing roughly 33% more upside (after a morning pop) for a stock that's already gained more than 500% in a single year, a price that would push Tesla's market cap close to $40 billion. In other words, Tesla would be worth about $1.75 million for every single car it sold in 2013 and $1.1 million for every car it plans to sell in 2014.

(...and quoted from the report:)

"If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again. If Tesla can become the world's low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries."

Let's look at the new markets (beyond "traditional" car sales and associated services) that are the basis for this new price targets (the chart below is from the same analyst report):


Thinking of two (additional) trillion-dollar markets for Tesla, namely

  • Stationary Battery / Grid Storage
  • Autonomous cars

certainly helped fuel the animal spirits of investors.

I have written about both markets before (see my earlier Instablogs for details) and I certainly don't think Tesla has these potential markets for easy grabs. Let's have a look who else is looking into these opportunities:

Autonomous cars: While I for sure don't claim to know all the details at least three other large companies claim to work on similar solutions: GOOG, Nissan and Daimler (and many more car companies are working on "near-autonomous" cars near-term, these are auto-pilot like systems that still require manual intervention from time to time). Nissan has an ambitious 2020 target for autonomous cars. Their current work in progress can be seen here and here.

Claiming that TSLA is at the forefront of these developments is dubious given the advances of GOOG and Nissan (which can also be seen on Youtube in many videos for those interested in details).

Stationary / Grid Storage: This is another field full of large and small competitors. I refer to a recent PDF where one can seen dozens of companies offering such systems (the PDF is in German and the prices in EUR, but the overview is easy to understand. The PDF lists vendor names, battery cell types, capacity in kWh and so forth.)

In short, it's dubious that TSLA has any unique or defendable advantages long-term over its competitors. The same applies to the current automotive market:

Integrated Battery Production: Vertically integrating battery production and later reuse/recycling spent batteries has been achieved by a large car company already: Nissan-Renault.

The company saw pricing and supply issues when it started making mass-market Evs and was an early mover back in 2009 with battery factories for the Nissan LEAF car (by 2013, three factories on three continents were built). The challenges faced by Nissan will also apply to the Tesla factory in a few years.

Battery technology keeps changing and the initial investments needed are huge.

Strategically, it may make sense for TSLA and other car companies to produce their own batteries for mass-market EVs. It looks like they are even forced to go down this route: No supplier is apparently willing to take the huge risks and build giant plants at this stage (Tesla alone will need about 30 GWh of battery capacity for its future mass-market Model E car, that's a huge number !). Another goal is cost reduction (Tesla is promising cost reductions of 30-40% by vertically integrating cell and battery production as well as recycling and reuse of spent batteries).

But that still doesn't make batteries a highly profitable business. Large Asian companies involved in cell and battery manufacturing for decades couldn't make it a high-margin business (Samsung SDI, LG Chem, Panasonic, Sony and others). These are companies who know a thing or two about mass-manufacturing.

According to sources, Nissan-Renault spent 4 to 5 billion EUR on their various EV programs and battery factories as of early 2014.

Tesla will need even more battery capacity per car because it specializes in long-range EVs.

While Nissan-Renault is the clear leader in EV sales globally (see here for details), its sales lag well behind earlier projections. Selling 1 to 1.5 million EVs has now been postponed to 2020 - the original goal was to achieve this by 2016.

The car market is slow-moving. It can't be disrupted overnight like other sectors once a product is on sale (as in IT/software or biotech). Battery-only EVs will probably account for no more than 2-5% of all vehicle sales for the next decade - even the hugely bullish MS analyst is only projecting the market share for TSLA at 0.9% by 2028. I wouldn't call this disruption.

Summary: Once observers start digging for details, they will find out that most claims and advantages attached to Tesla aren't that unique or easily defendable long-term.

As for why an analyst would publish a wildly bullish report on TSLA only days (!) before the company likely announces a huge battery plant? Why not wait until all facts and partners are know and then announce a new price target for TSLA?

That would probably be worth an article of its own. I will only say I find this as a strange "coincidence". The battery factory investment will likely require billions of dollars and involve several external partners. Even with partners, this will require Tesla to get new fresh capital one way or the other, be it debt, dilution or a separate legal entity raising the capital. (e.g. a new JV called "Tesla Energy"). In any case, Wall Street is the intermediary for such huge transactions.

I will let readers draw their own conclusions. Honi soit qui mal y pense.

Disclosure: I am short TSLA.

Additional disclosure: I may add to my short position once the battery factory details are public.