Tesla now worth double Toyota as analysts factor in huge EV battery play

Published by

Bridie Schmidt and Giles Parkinson

August 18, 2020 11:14 am

Image Credit: Ding Ting/AP

Tesla stock is going through the roof, hitting its highest point ever and putting its market value almost twice that of Toyota, the next largest auto maker on the planet by market capitalisation.

Tesla shares have bounded ahead in 2020 on a diet that includes its new gigafactories, the release of the Model Y, and anticipation on Cybertruck, Tesla Semi, battery and autonomy developments.

The latest rally saw the EV maker and battery storage provider close at $US1,835.64 on Monday, eight times that of twelve months ago, putting its market cap at $US342 billion, soaring past Toyota’s $US187 billion.

It comes less than a week after Tesla CEO and co-founder Elon Musk announced that Tesla would implement a five-to-one split of its stock at the end of August, in a bid to appeal to a broader base of investors.

Source: Google

But apart from the news that Tesla would make it stock more accessible to investors via a stock split there’s been no other material news to explain the most recent jump in share prices. But one insight may be the fact that lead analysts are now starting to factor in a big battery play.

Wedbush analyst Dan Ives, raised his bull case for Tesla to $US2,500 on Monday citing Tesla’s recent success story in China where the Tesla Model 3 is put upwards pressure on second-tier luxury brands largely thanks to Shanghai Gigafactory 3 (Giga 3).

“We continue to believe [electric vehicle] demand in China is starting to accelerate in July/August with Tesla competing with a number of domestic and international competitors for market share with Giga 3 remaining the linchpin of success which remains the prize that [Chief Executive Elon] Musk and Tesla are laser focused on capturing,” Ives wrote in a research note as reported by MarketWatch.

Despite this, he is cautious on giving guidance to investors to buy, reiterating the neutral rating he gave Tesla on April 25, 2019 when his price target was $US275 compared to Tesla’s then value of $US235.

However, Ives also notes that as the year inches towards Tesla’s highly anticipated Battery Day, the story around what Tesla will bring in terms of battery developments is also of great importance.

“In theory, this battery will support an electric vehicle for 1 million miles and be a major step forward when competing versus. traditional gasoline powered automotive competitors from both a [return on investment] and environmental perspective,” Ives wrote.

It’s a message echoed by Morgan Stanley’s Adam Jonas, who told CNBC that although his latest price target is well below current stock values at $US1360, he says Tesla is well positioned to become a dominant force in battery and software-as-a-service industries.

“Tesla stock deserves to have batteries as a business in the price,” Jonas says. In a report released last week, Jonas lifted his price target from $US1,050 to $US1,360, his second rise in a month. And his bull case price trumps that of Ives, and has been raised to $US2,636, from $US2,500 previously.

The reason for the base case upgrade is that for the first time, Jonas and his team at Morgan Stanley have factored in the potential of Tesla emerging as a major supplier of batteries in its own right, and becoming an integrated supplier of EVs and battery technology, including to other car companies.

“We now give Tesla credit for a 3rd party battery/EV powertrain supply business in our base case,” the analysts say. This alone is worth $US310 a share, and the reappraisal comes just a month before the much anticipated Battery Day.

The metrics of this 3rd party volume is enormous. Morgan Stanley predicts 2.5 million units by 2030 – in addition to the 3 million units to satisfy Tesla production. By 2030, it estimates third party battery cell output of 200 gigawatt hours.

At assumed revenue of $106 per kilowatt hour, and more revenue from powertrain componentry, that could deliver third party revenue of $US41 billion by 2030, and Ebitda of more than $US8 billion. By 2040, that revenue pie could grow to $US120 billion a year. (See graph below).

“While there is still room for discovery leading up to the September 22 Battery Day, the notion of Tesla supplying not only drive trains and software but superior battery packs to the auto industry is increasingly gaining validation,” the analysts note.

“Tesla currently controls roughly one half of the automotive battery production worldwide, and there is risk to incumbent EV battery producers if Tesla intends to ramp up its own battery production fast while implementing technological advances in process design, manufacturing and chemistry.

“The resulting cheaper cells with a higher-energy density would enable EVs to use fewer batteries per vehicle and still achieve longer range.”

Even so, Jonas remains cautious about the current market price. “Even Elon back in May said he thought his stock was over valued in his opinion,” Jonas told CNBC,

“He’s either a very bad stock picker, or he was just messing with us – I’m going to guess he was just messing with us.”