Tesla: Looking Beyond Earnings
Against a backdrop of nearing share price records and high expectations, Tesla is all set to release its Q4 earnings report, its first under its new name, Tesla, Inc. (TSLA), as well as its first since the acquisition of Solar City in November 2016. Here are some plans that could shape its long-term growth, and we'll glance through some of the more immediate issues weighing on investors' minds.
On February 1, the company formally changed its name from Tesla Motors, Inc. to Tesla, Inc. reflecting its plan to move beyond electric cars. The first step indicative of this strategy has been its acquisition of SolarCity which has the potential to “create the world’s only integrated sustainable energy company, from energy generation to storage to transportation.”
In financial terms, SolarCity is expected to add approximately half a billion dollars to Tesla’s balance sheets over the next 3 year period. Further, the acquisition will result in direct cost synergies of about $150 million due to cross-selling, corporate and overhead savings, elimination of overlapping R&D and product development efforts.
Creating solar roofs with integrated battery storage one such long-term goal.
Tesla’s vision looks beyond consumer vehicles to include other forms of land transport such as heavy-duty trucks and high passenger-density urban transport. These electric vehicles could be unveiled sometime in 2017.
Tesla is optimistic about autonomy in vehicles and believes that “as the technology matures, all Tesla vehicles will have the hardware necessary to be fully self-driving with fail-operational capability, meaning that any given system in the car could break and your car will still drive itself safely.”
Panasonic Corporation’s CEO has expressed his desire to extend its partnership with Tesla beyond batteries into self-driving technology.
It is expected that, “by 2035, 12 million fully autonomous units could be sold a year globally, and the market for partially and fully autonomous vehicles is expected to leap from about $42 billion in 2025 to nearly $77 billion in 2035” as per a BCG report.
A combination of electric and autonomous vehicles especially in heavy vehicle segment presents a great opportunity. “In the medium term (through 2040), on-highway trucks will likely be the first vehicles to feature the full technology on public roads,” according to a report by McKinsey & Company.
While these are Tesla’s long-term plans, it’s crucial to see how it fares in the near-future. Some factors to watch will be:
- The Model 3 has recorded an overwhelming number of reservations since its introduction in March 2016. Now all eyes are set on its production which is scheduled to begin in mid-2017. Earlier this month, Tesla had shut down its California plant production to prepare for Model 3, which created a buzz about its manufacturing timeline. At this stage, any positive news on its production schedule is highly awaited. Overall, Tesla produced 83,922 vehicles in 2016, an increase of 64% from 2015, although it fell short of expectations.
- The $2.6 billion acquisition of SolarCity by Tesla has been a big move and investors want to believe that it is a step in the right direction. While Tesla asserts that Tesla and SolarCity have a tremendous opportunity to “create a vertically integrated sustainable energy company offering end-to-end clean energy products,” insights on the process of its integration with Tesla will be watched closely.
- In an earlier report, Tesla projected that its Gigafactory would support 500,000 vehicles by 2020 and bring down the battery pack cost/kWh by more than 30% by Gen III volume ramp in 2017. In early January, Tesla and Panasonic began mass production of lithium-ion battery cells -- to be used in Tesla’s energy storage products and Model 3 at the Gigafactory. This is important as cheaper batteries are an important component in the wide scale adoption of electrified vehicles. From 2010 to 2016, battery pack prices fell roughly 80%, however, despite that drop to ~$227/kWh, battery costs continue to make EVs more costly than comparable ICE-powered variants according to McKinsey & Company, which projects EV battery pack prices to fall below $190/kWh by the end of the decade. Tesla’s lower battery costs will not just give EVs an edge over ICE vehicles, it will give it a lead over its peers. With the future of electric cars weighing heavily on cost-effective battery supply, and a promotional video suggesting that Gigafactory may bring down battery costs by 35%, updates on Gigafactory will be keenly watched.
In the past financial years, Tesla’s revenue has increased steadily, although it has incurred losses. Under operating expenses, its research and development costs as well as sales and administrative expenses, have risen at a fast pace. Tesla’s stock price isn’t tracking profits but Elon Musk’s ability to keep commitment and drive the company in the right path. If you can see beyond short-term movement, and believe that electric vehicles and solar energy are the future -- consider picking Tesla on dips over a period with a long-term view.
The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.