Investor's Corner

The Tesla Killer’s death and Elon Musk’s long-term play on batteries, vertical integration

At a press conference last year at Volkswagen’s global headquarters in Wolfsburg, Germany, VW Chairman of the Board Herbert Diess stated that “anything that Tesla can do, we can surpass.” The VW boss even noted that its dedicated MEB electric car architecture would give the company cost advantages at a scale that’s out of Tesla’s reach.

This year, the Tesla Model 3 is steadily making its presence known in the United States auto market. In September alone, the Model 3 was listed as the 4th best-selling passenger car in the US, beating the ubiquitous Toyota Corolla Family. Tesla also finished Q3 on a strong note, manufacturing a total of 80,142 electric cars including 53,239 Model 3, as well as delivering a total of 83,500 vehicles, comprised of 55,840 Model 3, 14,470 Model S, and 13,190 Model X. This Q4, Tesla seems poised to deliver and produce an even more impressive number of vehicles.

For years, Tesla skeptics have pointed at upcoming competition from legacy automakers as a reason for the impending fall of the electric car maker. Just like Herbert Diess, many of Tesla’s critics pointed out that legacy auto’s years of experience, as well as their network of factories, should allow them to leapfrog Tesla in the electric car market as soon as they decide to enter the electric car market.

As companies like Mercedes-Benz, Audi, Jaguar, and Porsche are learning today, though, it is not so simple to build a compelling electric car that’s capable of challenging Tesla’s premium vehicles in their respective segments. Mercedes-Benz, for one, has announced that the EQC — its plush competitor for the Model X — will adopt a gradual rollout due to possible warranty concerns over the vehicle’s battery and other electric car components. German news agency Bild am Sonntag recently noted that the Audi e-tron would be released later than expected as well, due to a software issue and ongoing discussions with its battery provider, LG Chem, which is allegedly adjusting the price of the vehicle’s batteries.

Even legacy carmakers that seem to be fully embracing the transition to electrified transport seem to be learning a lesson in designing and producing electric cars. Jaguar, for one, recently confirmed that the I-PACE has a range of 234 miles per charge, lower than the company’s initial estimates for the vehicle. Porsche, on the other hand, is preparing to build the Taycan, but even workers at its plant in Stuttgart, Germany have to pitch in to make the car a reality. Porsche head of production Albrecht Reimold, for one, noted that employees at the Taycan’s upcoming factory would not have regular salary increases for the next few years as the Taycan’s factory gets constructed.

With legacy automakers revealing their highly-anticipated Tesla competitors, and with each company running into challenges of their own, analysts are starting to retire myth of the “Tesla Killer.” Last month, Toni Sacconaghi of Bernstein, a known skeptic of the electric car maker, stated that the Model 3 faces “no credible competition” from legacy auto until at least 2020. More recently, Berenberg analyst Alexander Haissl reiterated a Buy rating on TSLA stock with a $500 price target, stating that fears over competition from legacy automakers are overblown. Haissl further noted that Tesla’s driving ranges and vehicle efficiencies are well ahead of the competition.

Perhaps the most notable death knell on the Tesla Killer myth came from known TSLA short-seller-turned-long Andrew Left of Citron Research; who pointed out that “there is NO Tesla killer. Competition is nowhere to be found, and no electric vehicle is slated to launch at the Model 3 price point until 2021.”

Ultimately, Tesla’s prominent lead in the electric car market is the culmination of Elon Musk’s long-term play on electric car batteries and the company’s vertical integration. Since Tesla is producing its own battery cells from Panasonic’s lines in Gigafactory 1, the company is saving itself from any of the issues currently being faced by Audi as it struggles to reach a deal with LG Chem for the e-tron’s batteries, or Mercedes-Benz as it deals with uncertainties over the EQC’s battery warranty. The deep integration of Tesla’s hardware and software also creates a unified user experience that is not unlike Apple, allowing the company’s electric cars to perform at their best and preventing issues such as those being faced by Jaguar with regards to the I-PACE’s apparent inefficiency.

The death of the Tesla Killer and the improvements in Tesla’s Model 3 ramp, together with the announcement that the Q3 2018 earnings call would happen on Wednesday, appear to have improved investor sentiment for the company’s stock. On Tuesday, Tesla stock (NASDAQ:TSLA) rose $33.19, ending the day at $294.14, up 12.72% from Monday’s close.

The Tesla Killer’s death and Elon Musk’s long-term play on batteries, vertical integration
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