Is it a good time to build positions in Tesla Motors Inc (TSLA) stock?
- Tesla has announced that its Gigafactory has commenced production of lithium-ion batteries.
- The company has achieved an important milestone in the run up to Model 3 production later in the year.
- What does this move mean for TSLA stock over the long-term?
When it comes to achieving set milestones within stipulated deadlines, Tesla Motors Inc (NSDQ:TSLA) has a rather spotty record. In May 2016, the company fast-forwarded its forecast for peak battery production by moving it up two years to 35 Gigawatt-hours of cell production and 50 Gigawatt-hours of pack production by 2018. It was a pretty audacious move that Wall Street mostly shrugged off as near-impossible.
But eight months later, Tesla has demonstrated that it can walk the talk by delivering on its bold promise. On January 4th, the company announced that it had kicked off production of lithium-ion batteries in partnership with Panasonic at the massive Gigafactory in Reno, Nevada. This move carries existential significance for a company that is better known for its unreachable deadlines. Tesla has over the past decade missed out on most of its aggressive milestones, including delaying production of Model X by three years. The fact that it has flipped the switch at the 4.9 million-square-foot facility demonstrates a sense of urgency by the company as it attempts to hit its goal to crank out 500,000 cars/year from its Fremont factory by 2018.
Source: Bloomberg Finance
Tesla shares have responded well to the announcement, tacking on gains of 7.1% in the first week of the new year, hitting their highest point since August.
Tesla 5-Day Share Returns
Source: CNN Money
The strong rally in Tesla shares has come despite the fact the company recently whiffed on its Q4 delivery goal. Tesla said that it delivered 22,200 vehicles during the quarter and 76,230 for the full year thus missing its already lowered full-year estimate of 79,000 units. (See Also: Tesla Motors Inc Misses On Deliveries Again, Time To Sell TSLA Stock?)
The next big test for Tesla will be to prove to the investing world that it can stay on schedule for its first mass-produced car, the Model 3. There's still a lot that the company has to achieve to make this a reality. For instance, the Gigfactory is currently only 30% complete, and might not be in a position to produce enough batteries for 500k cars every year. Battery availability is a major limiting factor for Tesla since the global supply of lithium-ion batteries is quite constrained. Even worse is the fact that those batteries are too expensive and would make it impossible for Tesla to sell the Model 3 at the target price of $35,000 without incurring huge losses. Tesla is banking on the economies of scale achieved from its massive $6 billion facility to keep production costs down. Bloomberg New Energy Finance (BNEF) estimates that it cost an average $200/kWh to manufacture lithium-ion battery packs in 2016. Tesla hopes to cut that in half to just $100/kWh by 2020, which will make the company the cheapest producer of lithium-ion batteries on the planet.
Source: Bloomberg Finance
The Gigfactory will not only produce battery packs for Tesla's cars but also to power homes and back up the electric grid. In September, the company announced a deal to supply 80mWh of energy storage to Southern California Edison to prevent blackouts and replace fossil-fuel electricity generation.
Promising Signs For Tesla Stock
Tesla Energy is still a small part of Tesla overall but it might not stay this way for long. Baird analyst Ben Kallo has picked Tesla as his #1 stock pick for 2017 saying the ramp of Tesla Energy and Model 3 will exceed expectations in 2017. That might seem like a stretch for investors who have remained skeptical about the company's ability to achieve its lofty goals.
But there are promising signs already. As Tesla has become a more focused company, probably after learning from its past failures. The progress at the Gigafactory has been astonishing due to technological advancements. Tesla's powerpacks are assembled using imported versions of the 2170 cell format that the company jointly designed with Panasonic. The result is that Tesla is now able to deploy energy storage projects in record time. For instance, its California energy-storage project would ordinarily have taken years to complete, but ended up taking just four months.
The construction of the Gigafactory itself has actually exceeded targets. Temporary exterior walls are rapidly repositioned to accommodate new sections, which allowed the factory to double in six months. It's not inconceivable that the factory will be fully complete in the next 24 months.
Tesla has also fulfilled its promise to roll out software upgrades to cars equipped with the new Autopilot hardware. Building cars are certainly harder than producing lithium-ion batteries. But Tesla's radical approach to manufacturing cars might eventually prove to be a winner. Car manufacturers prefer using a lean manufacturing model where they simply manage their far-flung supply chains instead of trying to hold inventory which is costly. Tesla, on the other hand, has adopted a vertically-integrated manufacturing model where it will control much of the supply chain instead of giving up control to third-parties. Other than manufacturing its own batteries, Tesla has managed to build an extensive supercharger network thus giving it a big advantage over rivals such as General Motors (NYSE:GM) and Toyota Motor Corp (NYSE:TM) whose EV customers have to rely on the much slower ChargePoints.
Tesla is still running things very much like a startup, but this is probably what it takes to disrupt the huge traditional auto industry.
Tesla has accomplished an important milestone by activating its Gigafactory battery production plant. Although this has breathed some life into TSLA stock, the best gains will come if the company can meet its target to start production of Model 3 later in the year. There's a good chance the company will be able to meet this milestone as well, so now might be a good time to build positions in TSLA stock.
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