Wedbush analysts Craig Irwin and Min Xu think Tesla Motors Inc (NASDAQ:TSLA)’s giga-factory could have big margin implications for the electric car-maker.
Tesla Motors Inc (NASDAQ:TSLA) announced the planned construction of a 35GWh giga-factory, which will be larger than the sum of the total lithium battery industry today. Cell production capacity will be 35GWh with pack assembly capacity of 50GWh, which Tesla Motors Inc (NASDAQ:TSLA) indicated would be sufficient to support production of ~500,000 vehicles. Tesla Motors Inc (NASDAQ:TSLA)‘s direct investment will be ~$2bn of a total ~$4-$5bn capital investment. The final production site is still being selected and initial production is planned for 2017.
The giga-factory is expected to drive over 30% lower costs, which we expect to be cumulative on roughly 15% to 25% cost gains expected by ’16 from current production. The total size of the facility is larger than the total size of the battery industry today, so scale will play an important role in cost improvement.
Specific details analysts reportedly would look for related to the facility include the chemistry of cells slated for production, and potential for solvent-free manufacturing. These could lower costs by 40% and 50%, respectively, which would raise visibility.
The company announced a convertible notes financing with total principal up to $1.84bn, and analysts expect strong investor appetite. The financing consists of two $800m convertible notes tranches with maturities in 2019 and 2021, with both tranches retaining a $120m underwriter’s overallotment. The company indicated in a release that they also expect to enter into hedge transactions to minimize dilution.
Tesla earnings forecast
Analysts are raising their 2017 earnings forecast primarily on higher gross margin assumptions as Tesla Motors Inc (NASDAQ:TSLA) indicated they expect costs to some down significantly during the first year of volume production at the new facility.
Analysts are raising their price target to $295 (from $225) and reiterate OUTPERFORM rating. Analysts’ target is based on 30.0x 2017E EPS of $12.00, discounting back two years (versus three years previously) using a 10.0% discount rate. The shorter discount period reflects a significant increase invisibility afforded by the new facility. They believe valuation based on 2017 estimates is appropriate as that is the first year Gen-III volumes are expected to scale, and view a 30.0x EPS multiple as fair since Tesla Motors Inc (NASDAQ:TSLA) should still be doubling earnings at that point.
Risks to the achievement of analysts’ price target include the potential for sales volumes below expectations or for profits below miss targets. In the longer-term, they see the most significant risks coming from possible cost escalation in the Gen III vehicle platform and risks of push-outs in Panasonic Corporation (OTCMKTS:PCRFY)‘s advanced battery technologies possibly resulting in slower-than-expected improvement in battery costs.