Tesla, Inc. (Nasdaq: TSLA, Rated “C”) held its annual shareholder meeting after the close yesterday, but traders were more interested in an announcement about battery technology.
For almost a year, analysts have been promoting today’s event. In a television interview on Tuesday, Dan Ives, an analyst at Wedbush Securities, said a new battery technology at Tesla is a paradigm shifter.
He’s right. It’s the reason Tesla shares are up 400% this year.
CEO Elon Musk knows what is at stake. In a tweet on Monday, he tried to tamp down enthusiasm for Battery Day. Musk wants investors to understand the new battery technologies are mostly intended to be used in three vehicles that have not yet been released: Tesla Semi, Cybertruck and Roadster. Also, Musk does not expect high volume production until 2022.
Nevertheless, those new products have won the hearts and minds of the targeted audience.
For example, the Semi prototype, a reimagined long-haul Class 8 truck, was revealed in November 2017. Musk claimed the vehicle would have best-in-class towing power, 400 miles of range at full load and could be recharged to 80% in as little as 30 minutes. At $180,000, the truck seemed like a bargain, and preorders from the likes of FedEx Corp. (NYSE: FDX, Rated “C”), Pepsico, Inc. (Nasdaq: PEP, Rated “B”) and Walmart Inc. (NYSE: WMT, Rated “B+”) piled up.
Car and Driver reported in 2018 that Semi orders reached approximately 2,000 units.
The problem is making those trucks requires a big advance in battery technology. Most electric cars use lithium ion battery technology. This is the same technology used for smartphone batteries. It’s preferable because it offers good high temperature performance and packs a lot of energy for the weight of the battery.
A higher power/weight ratio is vital for electric vehicles. The math is simple; the less weight a vehicle has to carry, the further it can travel per charge.
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Electric vehicles are already much cheaper to maintain because they have fewer moving parts than cars powered by internal combustion engines (ICE). The complete Tesla drive train has only 17 moving parts, versus in excess of 200 for most ICE vehicles. Often Tesla maintenance is possible with software adjustments alone.
Those software tricks, coupled with the instant torque from highly efficient electric motors, also leads to better performance. The internet is full of videos of stock Teslas blowing away expensive European supercars and hopped up American hot rods.
Better battery packs would put the longevity of Teslas on par with its inherent advantages from electric propulsion. More important, it would profoundly change the economics of Tesla as a business.
When EVs hit the mass market in 2010, the cost to manufacture lithium-ion battery packs was approximately $1,000 per kilowatt-hour of storage. By 2019, manufacturing costs were down to $187 per KWh.
After the close on Tuesday, Telsa announced the new 4680 battery cell, which could knock off another 56% of that cost while increasing range by 54%.
It would also give Tesla business managers new options. The company could maintain current vehicle pricing and fatten profit margins or cut prices and take dead aim at the entire ICE marketplace.
Musk split the difference. He’s going to uses advances to boost profits because businesses need to be profitable in order to grow. However, Tesla is also planning a new $25,000 EV with the latest battery tech.
A Deloitte study in 2018 found that EV pricing, followed by driving range, were biggest obstacles to widespread adoption.
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Tesla is already best in class for EVs in terms of battery performance and reliability. The company offers eight year, 160,000-mile warranties on all of its new vehicles. Other automakers have struggled to build battery packs that can match range and longevity. The 4680 will tip the scales in favor of Tesla completely.
It would also make ICE vehicles seem like a dumb choice by comparison. Gas guzzlers would be more expensive to fuel and maintain. Comparable cars would even be less fun to drive.
Like most Tesla presentations, Battery Day ticked a lot of boxes for bulls. It was full of cool futuristic tech and characteristic Musk enthusiasm. Unfortunately, most of the gear was at least 18 months away. The 4680 may not scale up for three to five years.
The stock was down following the presentation. I have never recommended Tesla shares because the timing never seemed right. And shares still trade at 14.7 times sales, which is an extremely lofty multiple for a manufacturing business.
Shares recently traded near $397.70.
I’m intrigued by Battery Day, but I’m still standing clear.
Best wishes,
Jon D. Markman
