Tesla Investors Unfazed By Battery Project Challenges

Tesla Investors Unfazed By Battery Project Challenges.

“Providing finance options for many of those purchases will be key, echoing the successful strategy that solar has already employed”

Tesla Motors investors are confident about the prospects for its venture into the home and business battery market, but more cautious observers point to the company’s probable need to raise new money, and others wonder if this might all be a bit too ambitious.

Investor confidence, for the time being, can be measured by Tesla’s share price performance since the May 1 announcement the company plans to sell batteries to store electricity for homes, businesses and utilities. Tesla shares have climbed steadily from around $230 to just over $240.

Morgan Stanley auto analyst Adam Jonas, in a report published Monday, said if investors a couple of years ago had been told Tesla would now be burning nearly $1.5 billion of cash and ruling out profits before 2020, maybe the stock price would be well below $100.

“The missing ingredient is the continued enthusiasm around Tesla’s addressable market opportunity for products that address many of the world’s problems in the areas of both energy and transportation. (CEO) Elon (Musk) and the team may be getting by on monetizing the imagination of the investment community. But the thing some may be underestimating is: Imagination is real,” Jonas said.

Tesla said it set up Tesla Energy to sell residential Powerwall and commercial Powerpack batteries to store energy from solar panels and other renewable sources which will store power when energy costs are low, and use them when demand and prices for conventional electricity are high. The project would absorb some production from Tesla’s so-called gigafactory in Nevada with partner Panasonic of Japan.

Boston, MA., consultancy Lux Research has some cautionary thoughts on the project, saying massive capacity for lithium-ion batteries is coming soon and Tesla and Panasonic need new markets to sell to. If it is to truly disrupt the stationary energy storage market, it needs more partnerships and acquisitions in power electronics, software, and with utilities. Lux also points out that the quoted price for domestic use of $3,000 will nearly double because of the need for an inverter, installation and other costs.

“Tesla’s stated goal of selling 30 per cent of its output from the 50 GWh Gigafactory to stationary markets implies about $3.7 billion in revenues in 2020. Providing finance options for many of those purchases will be key, echoing the successful strategy that solar has already employed,” said Lux Research’s Dean Frankel.

Morgan Stanley’s Jonas said investors are showing little concern about the possibility Tesla may have to raise new money.

“As we discuss the topic of Tesla’s tight (second half) liquidity position with investors, it is clear to us there is nearly a uniform acceptance of the situation and a calmness and confidence around the company’s ability to address cash needs,” Jonas said.

“Other investors are quite excited about the prospect of Tesla having the opportunity to expand its technical, human and physical capacity to affect change on a widening array of mission-critical business models,” he said.

Some cynics are wondering if Tesla’s move into energy storage reflects its long-term inability to sell its very expensive battery-powered Model S sports car, and its new Model X SUV set for launch later this year. After all, sales have been slow in China, and huge sales in energy-rich Norway look like slowing as government incentives are pared back.

Not so, says investment researcher Evercore ISI.

“We don’t see Tesla Energy compromising Tesla’s vehicle targets,” Evercore ISI said, adding that the economic proposition for electric cars versus conventional ones looks like a long-term winner, as internal combustion engine technology is subject to ever costlier research and development to meet tightening government CO2 targets.

“In contrast, the cost to develop and manufacture electric vehicles will continue to fall with breakthroughs in technologies and as economies of scale build,” Evercore ISI said.

The Financial Times of London’s Lex column wasn’t convinced.

Lex said there were several clouds on the horizon for Tesla Energy. Its batteries are based on lithium ion technology which powered most of today’s electric cars, but could be blind-sided by new materials. Demand for stationary batteries will need to be massaged, and that will be expensive.

“But it will be a long time before Tesla’s battery business produces returns. Its $5 billion battery factory will not start production at scale until 2017; Tesla says other ‘gigafactories’ will follow. But until signs of revenues and earnings are firm, Tesla’s battery business will stay in the category of utopian dreams,” Lex said.