UPDATE: Tesla's (TSLA) 'Disruptive' Business Model Nearly Priced In; UBS Starts at 'Neutral'

March 26, 2014 7:47 AM EDT
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(Updated - March 26, 2014 11:04 AM EDT)

UBS starts coverage on Tesla Motors (Nasdaq: TSLA) at Neutral with a price target of $230.

Analyst Colin Langan noted that, while Tesla has a potentially disruptive business model, most of the upside is already priced in. The analyst commented, "[Tesla] stock has rallied significantly in recent months, up 46 percent YTD, up 487 percent LTM, and up 1,195 percent since the IPO price of $17 in June 2010. While the rally has been driven by a series of positive news flow, at this point, we see risk-reward as slightly skewed towards the downside ... We do not see a near-term catalyst that could drive the stock further, as the launch of the Model X is not until spring 2015, the launch of the Gen III mass-market vehicle is at least three years away, it is too early to add a new plant, and management has already guided to a production level of 0.5m vehicles by 2020."

UPDATE - Langan outlines upside and downside scenarios for Tesla.

Upside:

Tesla stock appreciation is based on earnings power through 2020. Langan sees upside limited to Tesla's manufacturing capacity of 500k vehicles ending 2020. In our upside scenario, we estimate Tesla to produce and sell 475k units for the full year, and achieve a 17.4 percent automotive operating margin helped by a 51 percent reduction in battery cost. EPS in this case would be around $24.83 in 2020, which is about 55 percent above the analyst's base case of $16. With a 15 times P/E? multiple applied, that puts Tesla's stock price at $372.


Downside:

Langan sees downside as absolute. Tesla is still in the early stages of growth an any problems with current or future products could be materially crippling. In this scenario, the analyst is looking for sales of just 275,000 units annually by 2020, taking into consideration the high price-point of the Model S and Model X and also considering weak adoption of Tesla's Gen III vehicle. The scenario also assumes more aggressive pricing, and higher material and battery costs which, combined with the high fixed cost leverage, would result in automotive operating margin of 2.1 percent, the analyst said. EPS in this case would be $2.74 in 2020, which is 83 percent below the analyst's base case. That puts Tesla shares at $41 with a 15 times multiple.

Auto Growth:

For the auto industry as a whole. Langan is modeling 3.3 percent CAGR from 2013 through 2020 with global premium vehicle sales growing a 4.5 percent CAGR over the same period. Tesla is expected to hit 3.5 percent market share of the global premium market by 2020 with around 6.5 percent of the North American premium vehicle market over the same time frame.

Battery Challenges:

Langan is mostly bearish on Tesla's battery ambitions with respect to pricing. The below notes refer to Argonne National Laboratory's BatPac 2.2 model. (pdf here.)

Tesla’s long term upside largely depends on its ability to lower the battery cost. If consumers expect a 3.5-year payback on EV savings, this would translate into a ~$6,125 premium for an EV ($1.75k annual savings). A traditional engine costs about $5k, so the comparable EV battery cost would need to be ~$11k. At 80 kWh, this implies the cost needs to be ~$140 per kWh to be competitive in the mass-market vehicle.

Tesla estimates its current battery costs are $200 - $300 per kWh and will fall by 30 percent with the launch of the Gigafactory in 2020, implying a cost of $175 per kWh (average), which would be very competitive with even a mass market vehicle. That said, our cost analysis implies a higher cost today of ~$340 per kWh. In November 2012, Tesla announced that under its battery replacement program, it will replace a battery for $10,000 for the 60kWh model and $12,000 for the 85KWh model after 8 years. Since most of the cost involved in replacing the battery includes replacing the cells, we estimate that the implied cost of the cell alone in 2020 is in a range of $140 - $165/kWh.

We see Tesla’s ~$175 per kWh target as very challenging. Argonne lab's models for battery pricing implies that Tesla's battery chemistry (NCA) can be driven down to a cost of $160/kWh, 76 percent of which is raw material costs, which implies raw materials are about $120/kWh and setting the absolute floor for current chemistries. Purchased items are another $13/kWh (including items used for building the pack, the module, terminal assembly, and cell container). This leaves the remaining $26/kWh for warranty costs, depreciation, labor, overhead, and supplier profit on the cells. We believe Argonne's cost forecast is optimistic and leaves little room for error.


For an analyst ratings summary and ratings history on Tesla, click here. For more ratings news on the company, click here.

Tesla Motors closed at $220.44 yesterday.


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