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Doubts over Tesla's mass-market potential

David Whiston, CFA, CPA, CFE  |  24 Sep 2020Text size  Decrease  Increase  |  
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Tesla has a chance to be the dominant electric vehicle firm and is a leading autonomous vehicle player as well as a vertically integrated sustainable energy company with energy generation and storage products, but we do not see it having mass-market volume this decade.

Following Tesla's September 2020 Battery Day, we are raising our fair value estimate to US$195 from US$173. Based on continued strong demand for Tesla’s vehicles and battery costs likely to come down and enable cheaper models around 2023, we are increasing volume deliveries for 2020-29 by about 10 per cent.

Cell cost reductions outlined at Battery Day led us to increase modelled revenue for the energy storage business across 2020-29 by about 33 per cent, resulting in the fair value increase.

Tesla's product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high. The Model X crossover released in late 2015 starts at about US$80,000 ($113,000), the Model S sedan's starting price is about US$75,000, the Model 3 sedan starts at US$37,990, and the Model Y crossover starts at about US$50,000. Tesla’s US customers no longer receive the federal tax credit.

Tesla’s gigafactories may become terafactories as Tesla seeks to grow its cell capacity to 3 terawatt-hours by 2030 from 0.1 terawatt-hours in 2019. A new factory in Shanghai, wholly owned by Tesla, opened in late 2019 with capacity for 200,000 Model 3 and another 150,000 units for Model Y online in 2021. Gigafactory Berlin (3 and Y) is under construction until 2021 as is a Texas plant for the Semi, Cybertruck, and 3 and Y.

Tesla's global vehicle capacity may reach nearly 800,000 by year-end 2020, and 2020 deliveries may reach or exceed 500,000 units despite covid-19. Tesla sold about 368,000 vehicles globally in 2019 and long-term chief executive Elon Musk targets annual volume of 20 million, about double the size of Toyota and VW Group. We think global mass adoption of pure electric vehicles is still years away, but Tesla is the leader in the space.

Tesla (TSLA) - MAX

A chart showing the share price growth of Tesla since 2010

Source: Morningtar Premium

Tesla will have growing pains, recessions to fight through before reaching mass-market volume, more competition, and needs to pay off debt. It is important to keep the hype about Tesla in perspective relative to the firm's limited, though now growing, production capacity.

Tesla's mission is to make EVs increasingly more affordable, which means more assembly plants must come on line to achieve annual unit delivery volume in the millions. This expansion will cost billions a year in capital spending and research and development and will be necessary even during downturns in the economic cycle.

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

David Whiston is a senior analyst with Morningstar.

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