Barclays Equity Research analysts Brian A. Johnson, Dan Levy and Steven Hempel maintain an Equal Weight rating for Tesla Motors Inc (TSLA) as they consider its expansion into Europe.
Positive business momentum, but margins keep us EW
Over the last three days we hosted Jeff Evanson, VP, Investor Relations at Tesla Motors Inc (TSLA), for meetings with investors across seven cities in Europe. Given the momentum in the stock, demand was extremely robust, with some meetings getting upwards of 40 investors. The meetings provided us with better appreciation of the ongoing momentum at Tesla – revenue growth will be driven by the international rollout, and battery costs are coming down, which at some point may make the Gen III vehicle a viable option for consumers. However, we reiterate our EW rating as the path to margin expansion will be gradual – although Tesla believes it can ultimately generate mid-teen op. margins, investors should expect closer to low mid single digit margins as Tesla invests in its growth. Moreover, we already give Tesla the benefit of the doubt in valuation on many fronts, and we see the grid storage opportunity as only a 20-25% boost to valuation, not the doubling that some expect.
Battery costs to come down, powertrain cost ultimately in parity with other OEMs
According to Tesla Motors Inc (TSLA), battery costs are currently $200-300/kWh, and are expected to decline 5-10% annually through 2016, with a 30% reduction in 2017 once the gigafactory is ramped. Assuming a $275 cost in 2013 and 5% reductions, this would imply a cost of ~$165/kWh by 2017. Although we had previously assumed Tesla’s powertrain cost to be higher than other mass-luxury OEMs even when considering a 30% cost reduction, Tesla believes that battery cost of $100-150/kWh is the point where total powertrain cost could be equal to or lower than luxury ICE OEMs when taking into account that Tesla spends less on energy conversion (i.e., motors, gears).
Tesla’s China demand promising, but challenges in Germany
Although upside exists for Tesla Motors Inc (TSLA) in China, we sensed skepticism from investors around growth prospects in Germany, Europe’s largest luxury market, given predisposition toward German cars. Moreover, today’s announced price cut may be a sign of stalled demand in Germany.