Tesla Motor (TSLA, Financial) is planning to construct the world’s largest battery factory. The company could produce more lithium ion batteries in a year than the total amount of batteries that were produced, around the world, in 2013. Moreover, the company could bring down the lithium ion battery costs by at least 30%, which could give a significant boost to its earnings.
The news was welcomed by investors and Tesla’s shares, which were already trading at lofty valuation levels, went even higher. In my previous article for GuruFocus, I mentioned that Tesla is laying foundations for solid growth in the coming years and therefore investors should not sell their Tesla shares. Since then, the company’s shares have been up more than 50% and are currently trading 63 times its 2015 earnings estimates, as per data compiled by Thomson Reuters. This is expensive even for a technology stock.
Tesla, however, is a disruptive technology stock. Therefore, its stock will likely continue to trade at extraordinary multiples of earnings; like 3D Systems (DDD, Financial), or the fuel cell makers such as Ballard Power (BLDP, Financial) or Plug Power (PLUG, Financial), or Amazon (AMZN, Financial).
The company’s recent quarterly results have shown that Tesla is heading in the right direction. The company has significantly reduced its losses while its revenues have more than doubled. In short, Tesla is getting bigger and better and as a result, its shares could continue going higher.
The Gigafactory
The planned 10 million square foot Gigafactory could be located in American Southwest, although no official word has come out yet. According to Los Angeles Times, Tesla is not going to build its factory at its stronghold – California – due to high real estate costs. Nevada, on the other hand, appears to be a likely candidate.
The facility, which could create around 6,500 jobs, will come with a price tag of between $4 billion and $5 billion. By 2020, it could be producing batteries for nearly 500,000 electric cars each year.
Tesla is also thinking about selling the batteries for homes, utilities, as well as commercial consumption.
Tesla founder Elon Musk believes that this facility would significantly improve the company’s ability as it moves forward with a plan to produce affordable electric vehicles in about three years. The business is eying significant reduction in costs of battery packs.
A battery manufacturing facility of this size and scale has never been constructed before. The project could propel the pace of innovation in batteries. The facility itself will likely go on to become a marvel of modern engineering.
Tesla will invest around $2 billion in the factory. To fund the project, the company has raised $2 billion through a convertibles debt offering at attractive rates. The remaining $3 billion will be raised by Tesla’s partner(s) through 2020. No official word on the name of the partner has come out yet but Panasonic, the primary supplier of lithium ion batteries to Tesla, appears as the most likely candidate.
According to a Stifel Nicolaus analyst, Tesla’s batteries will likely be able to store large amounts of renewable energy. Therefore, in the long term, Tesla could end up becoming a power storage company. If that happens, then one of the biggest beneficiaries will be Elon Musk’s SolarCity Corp. (SCTY, Financial), a supplier of solar power systems. The solar company could end up becoming a partner in the Gigafactory.
Solid Earnings
Last month, Tesla released its quarterly results that blew past analysts’ estimates.
The company’s loss shrank to $16.26 million from $89.93 million in the corresponding quarter last year. Adjusted earnings came in at $45.92 million, or $0.33 per share, which was much higher than market’s expectations of $0.21 per share. Meanwhile, its revenues doubled to $615.2 million from $306.3 million in the same quarter last year. Adjusted revenues were $761.34 million, $104.19 million higher than analysts’ estimates.
The company reported quarterly deliveries of 6,892 vehicles. The better performance is also reflected in the gross margin rate of 25.2%, which is in-line with estimates.
For the full year, Tesla’s losses shrank to $74.01 million from $396.21 million in 2012 while revenues climbed to $2.01 billion from just $413.26 million in the prior year. This was the first full year of Model S production. The company delivered 22,477 Model S in 2013.
The company has also given a forecast that supports its growth story. The company is eying significant uptake in production in 2014. The company will ramp up the production capacity of Model S and Model X. For Model X, Tesla will incur higher engineering and design expenditure which could cause an increase in overall R&D expenditure. The car is expected to be released later this year.
By the end of the year, Tesla will be producing 1,000 cars per week, a significant increase from the current levels of 600 cars per week. Meanwhile, production will increase to 7,400 units in the current quarter. For the full year, Tesla is eying more than 55% growth in Model S deliveries to 35,000 units.
The current battery supply issues could continue to hurt the company throughout the first half of 2014. But Tesla is eying significant improvements in the second half.
As mentioned earlier, its gross margins of 25% were in-line with expectations. These would improve to 28% by the final quarter of 2014.
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.
