Jeffereis Sees 1,000bps of GM Tailwind for Tesla (TSLA); PT Up to $365

September 17, 2015 6:43 AM EDT
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Price: $191.97 -2.76%

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Jefferies analyst Dan Dolev reiterated a Buy rating and bumped his price target on Tesla Motors (NASDAQ: TSLA) to $365.00 (from $360.00) after detailing a path to 1,000bps gross margin tailwind.

"Lowering battery cost via changes to cell chemistry and Gigafactory scale benefits are critical determinants of Tesla's ability to sell an affordable Model 3 starting at $35K," Dolev commented. "Our detailed battery component cost analysis details a path to 50%+ reduction in battery pack cost to $125/kWh by 2020, driving up to a 1,000bps vehicle GM tailwind, placing TSLA at the upper-end of peer OEM profitability levels."

Dolev highlighted the following:

  • Tesla's lithium-ion battery has key advantages. Our component cost analysis offers a detailed build up to Tesla's estimated $250/kWh current battery pack cost, or about 20% of the average ASP of a Model S. We believe that Tesla's use of an efficient nickel cobalt aluminum (NCA) cathode (i.e. the positive electrode), use of a silicon synthetic graphene anode (i.e. the negative electrode) that has 2-6x the lithium-ion storage capacity of today's standard graphite anode, and a possible use of water-based anode solvent, are key advantages.
  • We expect changes to cell chemistry and Gigafactory scale benefits to reduce battery cost by 50%+ by 2020. Our analysis details a potential path to a 30% cell-level cost reduction to ~$88/kWh by using a more efficient lithium-rich nickel cobalt manganese cathode (vs. NCA), doubling the percentage of silicon in the synthetic graphene anode, replacing the liquid electrolyte with an ionic gel electrolyte which eliminates the need for a separator, and using a water-based electrode solvent for the cathode. The Gigafactory, which is expected to begin production in early '16, should drive down pack-level costs by 70% to ~$38/kWh via economies of scale, supply chain optimization, increased automation, and production domestication.
  • Reducing battery cost by 50% can drive up to 1,000bps GM tailwind by 2020, making Tesla's Model 3 viable. With a Model 3 base price of $35K (~1/2 of a Model S base), reducing battery pack cost is critical to its economic viability. Our analysis demonstrates that Tesla can reduce its battery pack cost from an est. 21-22% of ASP to 12-13%, helping Tesla achieve a vehicle gross margin at the upper-end of peer OEM levels (33% for Models S/X and 23% for Model 3). Consequently, we are raising our 2020 vehicle gross margin estimates, which drives a 4% increase to our long-term EBITDA.

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