- Tesla Motors couldn’t meet investor expectations following the surprise announcement of the P100D.
- It seems expectations were tied to the announcement of a new vehicle category.
- Given the poor feasibility dynamics of introducing another vehicle, there’s nothing newsworthy to drive shares much higher.
Tesla (NASDAQ:TSLA) more or less disappointed with Tuesday’s announcement, because analysts on both the buy/sell side were speculating on a more noteworthy product announcement, which was the autonomous semi-truck. The speculation was partially driven by Uber’s recent acquisition of Ottomotto, which is a start-up focusing on autonomous logistical infrastructure, which would tie into Uber’s logistic ecosystem except without drivers. An autonomous truck would likely require a co-conspirator, i.e. Tesla Motors to design an electric vehicle that has the capability of hauling truckloads of industrial goods.
It was broadly cited in sell side reports a couple of weeks ago, as a potential source of growth. However, investors were probably anticipating some sort of a new surprise announcement, and a preponement of the timeline for unveiling an autonomous truck capable of carrying large payloads. However, when running the cost analysis, I come away with the impression that feasibility dynamics of such a vehicle are limited in the immediate term.
So, instead of receiving the news of a semi-truck we ended up with an announcement involving the Tesla P100D, which is set to be the fastest production vehicle on the market, and will also have an extended range. The news didn’t sway the opinion of investors much. So Tesla shares gave back recent gains with the stock trending lower.
Investor expectations are almost unbeatable at this point
After rallying following the announced acquisition of Solar City, the stock didn’t have supportive news to drive the share price any higher. The super high-end of the automotive segment is quite limited, so the impact on ASPs are unlikely to be so substantial that it would alter financial models by much. While the motivation to improve the profitability of Model X/S should have been well-received, the impact of introducing a new top-tier car is unlikely to revert the continued decline in profitability post the acquisition and integration of Solar City.
Investors have limited growth catalysts up until volume production of the Model 3 in 2018. Ironically, visionary projects by Elon Musk, the gigafactory or new vehicle lines provide the story-driven narrative, but filling out the product line with higher-end Model S/X variants doesn’t provide enough impact to drive the stock price higher (despite the practicality).
The new P100D adds an incremental 10 kilowatt hour pack to the highest-end 90D, which translates into 315 miles of driving range. This exemplifies Tesla’s advantage with battery technologies and future potential to design larger battery packs. However, Tesla’s battery production capacity doesn’t even accommodate the introduction of semi-trucks, so the speculation on future impending technologies is kind of meaningless in the five-year time frame unless TSLA were to signal a massive increase in battery production capacity.
Feasibility dynamics of the semi-truck
Tesla announced recently in its updated Master Plan that it was in the initial design phase of a semi-truck and a pick-up truck. The trucking segment is quite substantial in size and has a disruption potential.
As mentioned in a Morgan Stanley report:
Tesla announced an electric semi last month as part of its “Master Plan Part Deux” (see our note here) which could also be coupled with a fleet-management like service, potentially making Tesla the industry’s first vertically integrated truck OEM + carrier.
The analysts at Morgan Stanley, Ravi Shanker and Adam Jonas, mentioned that autonomous trucking fleets could translate into a 75% reduction in operating costs. Hence, the potential of this new product category inflated expectations prior to Elon’s announcement of the P100D.
The introduction of a new line-up of BEVs (battery electric vehicles) that are inclusive of trucks and semi-trucks has its own shortcomings. A mass-produced semi-truck will cost substantially more than competing trucks, as the 100 KWH battery pack for the Model S is estimated to cost $19,000 based on UBS estimates at $190 per KWH. Therefore, the cost of an even denser battery reduces the likelihood of an autonomous fleet of semi-trucks in the immediate five-years despite the cost efficiency gains from reduced labor.
Then there’s the overwhelming demand for mass-market cars that are not only affordable but will carry the bells and whistles of autonomous functionality once regulation catches up with the technology.
I would imagine that a BEV semi-truck would need a substantially larger battery pack since the tow load of a typical semi-truck is perhaps 20,000 to 80,000 pounds. When compared to the weight of the Model S at 5,000 pounds, it would require a battery pack that’s 10x the size of the current P100D (or perhaps even more) to match the range at 50,000 pounds. In terms of cost, a 1,000 KWH battery pack would cost $190,000 in the worst case scenario, assuming a cost of $190 per KWH.
However, the more optimistic scenario, based on Elon’s comments is $100/KWH, which prices the battery at $100,000. A new semi-truck running on a diesel engine costs around $100,000, but a Tesla semi-truck would cost $175,000+, which would require a significant payback period in terms of reduced overhead and fuel costs, which is why I’m weighing the semi-truck as a diminished possibility and assuming it won’t reach full-production for quite a while longer.
There are substantial manufacturing constraints to both battery packs and assembly. The trucking category isn't proven to be a higher margin category than the Model 3. Furthermore, the unveiling of a prototype could be pushed back a couple more years.
Investors should consider avoiding the stock until there are confirmed details of ramping production for Model 3. The integration of Solar City has been viewed negatively, and while a holistic approach to green energy/transportation across major verticals could gain further investor support, the current perception is broadly negative.
While semi-trucks sound promising, and may have contributed to the recent run-up in valuation, it’s worth noting that a new vehicle introduction won’t contribute to valuation until production concerns are fully resolved. Furthermore, the new category does carry the promise of disruption and expands the revenue levers by which management can justify further increases to Capex, but it will also raise new concerns over excessive leveraging of the balance sheet.
As such, I continue to reiterate my hold rating on Tesla Motors.