The new year is shaping up to be a make-or-break year for electric vehicle innovator Tesla Motors Inc (NASDAQ:TSLA). That’s because we finally get to see whether CEO Elon Musk’s vision of a fully integrated clean-energy company — spanning production, storage and end-use of renewable energy — can come to fruition. Needless to say, TSLA stock holders will be watching with eyes as wide as dinner plates.
Last year, the major piece of the puzzle was the
bailout buyout of fellow Musk company, SolarCity. That deal will supposedly tuck in the generation part of the plan.
But right now, the story is all about storage. Tesla finally flipped the switch on its massive battery production facility — dubbed the Gigafactory.
Without it, there’s no way Tesla Motors can deliver on its lofty long-term goals. Nor can the company support the lofty price on TSLA stock, either.
The Gigafactory not just a battery farm. It’s a critical piece of the Tesla Motors story.
Tesla’s Big Plans for Its Big Gigafactory
Lithium batteries make the world go ’round. Storage of energy is a key component in basically everything, from solar panels to your smartphone. And lithium battery production has long been dominated by Japan, China, and other southeast Asian nations; roughly 88% of the world’s battery production comes from the region.
Tesla’s problem is an ambitious goal of delivering 500,000 vehicles in 2018 … which will take a ton of lithium batteries. Current production isn’t up to snuff, by a lot. There’s a significant shortfall.
Like most Elon Musk solutions, Tesla’s fix for its battery problem is a large one.
A few years ago, TSLA partnered with Panasonic Corporation (ADR) (OTCMKTS:PCRFY) and started construction on a massive plant in the Nevada desert. The dubbed Gigafactory would design and build the needed batteries to arm itself — and potentially other vehicle makers, electrics firms and others — with the needed batteries to store energy. Over the spring, Musk and TSLA predicted that the facility would be able to crank out nearly 50 gigawatts worth of production by 2018 — more than the world currently produces.
On Wednesday, Tesla Motors turned on the third of the Gigafactory that is completed and started production of batteries.
The Gigafactory Is Critical
The Gigafactory’s launch is a significant moment for TSLA stock, because it will help determine Tesla’s ability to survive, and how healthy that survival will look.
Without the Gigafactory, Tesla simply can’t deliver on its EV production goals. The rest of the world does not make enough batteries, period. Plus, a lack of supply leads to another issue: affordability. The Model 3 is supposed to be an electric car for the masses that takes Tesla Motors from a hobby car for the rich to a staple for your average Joe.
But current battery prices are too high to make the $35,000 vehicle profitable. And despite its cult stock following, Tesla still is a publicly traded company, and TSLA stock holders will increasingly demand profits.
By building its batteries in-house, Tesla should be able to drive down costs for the critical component and make the Model 3 a profitable endeavor. One would hope so, considering that TSLA took out around $5 billion in debt to build the facility.
Equally as important is TSLA’s other plans for the facility. Musk & Co. are planning on building battery packs for energy storage from renewables and other sources. That includes its Powerwall and Powerpack batteries that store energy from its SolarCity and utility customers.
This is a double-edged sword.
Even amid a shortfall in batteries, battery prices tanked last year. According to Bloomberg’s New Energy Finance unit, prices for lithium batteries sank by 22% in 2016 and are estimated to fall by another 15% this year. That’s great for Model 3 profits and sales to utility customers, but not great for its actual battery production arm. If Tesla plans on selling its battery packs outside its doors — and it does based on its estimated production size and recent deals — then it needs to find the perfect price in the middle. Not too hot and not too cold.
That needs to happen soon, too. The first things rolling off the Gigafactory line are storage batteries, not vehicle packs.
This Is Everything to TSLA Stock
Tesla’s Gigafactory is a much-needed gamble. Without it, Musk can’t achieve his vision of having an integrated clean energy company. Tesla will never be able to sell enough cars cost-effectively, get solar panels on everyone’s roofs and provide energy storage for larger utility companies.
Obviously, if it can’t do that, TSLA stock is sunk. Tesla Motors already had enough mishaps on its own without SolarCity and the Gigafactory weighing it down under certain worse- and worst-case scenarios.
Thus, the Gigafactory is a make-or-break strategy in a make-or-break year for Tesla Motors. If Tesla’s past is any indication, things won’t go perfectly smoothly — but they must go at least somewhat according to plan to keep TSLA from hurtling toward the earth.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.