Tesla would need to spend up to $180 billion to reach Chief Executive Elon Musk’s goal of producing 10 million electric vehicles annually.
That’s the assessment of the auto industry analysts at Morgan Stanley research. They have watched Tesla stock climb to more than $800 a share but remain cautious, saying it should be worth about $680.
It’s not that they are giving Tesla and Musk poor marks for the company’s latest financial performance. It has a string of profitable quarters, and would likely have marked 2020 as its first full profitable year if not for the pandemic-caused recession. Rather, the investment house sees multiple risks ahead, with the top being how much money it will take to build the auto plants and massive battery factories required to produce electric cars at volume. Tesla has built a little over 1 million electric vehicles since it launched 17 years ago. Here’s what the Morgan Stanley analysts say:
Morgan Stanley forecasts Tesla to spend $66 billion in aggregate capital expenditures through 2030.
“However, Elon Musk’s goal reaching 10 million units of vehicle volume supported by ‘terawatt’ scale battery factories would imply far greater levels of spending than we have forecasted and greater than we believe demanded in global markets for many years to come,” the analysts wrote in a report for investors. A 10 million car volume would require at least 15 factories and roughly 800 GWh of battery capacity. That is nearly 30 times what Tesla produces now. Ramping up to that level of manufacturing capability would take $150 billion to $180 billion, the analysts said.
The growing tension between the Trump administration and China over the COVID-19 pandemic and economic issues such as tariffs could upset Tesla’s plans for China. It is a crucial market for the Palo Alto, Calif., electric vehicle company.
“We believe Tesla China will jump from an estimated roughly 13 percent of Tesla volume in 2019 to nearly 30 percent this year,” the analyst said. That business accounts for as much as $50 to $70 of valuation per Tesla share, they said.
Tesla needs cordial U.S. relations with China to continue to grow its business there.
Morgan Stanley estimates Tesla deliveries will drop 13 percent in the second quarter of this year compared to the first quarter of 2020. Of course, this is because of the economic crash caused by the pandemic. But to cover that drop Tesla will likely burn through $2.7 billion, a huge chunk of cash.
“While we believe the market will largely look through 2Q results as a one-off bottom, risks remain as to the level of demand resiliency in the U.S. and Europe through the second half of the year. While we’re prepared for some impairment of demand, we’re also acknowledging the potential shortages in supply of finished Tesla products relative to its large order backlog,” the analysts said.
They believe Tesla will produce about 420,000 vehicles this year.
Tesla is not alone in the electric car space. Other companies, including tech giants such as Alphabet, Apple and Amazon could jump into the business. Amazon already has a large investment in the Rivian startup electric truck venture and ordered 100,000 electric delivery vans to be deployed starting next year. Legacy automakers also are starting to offer more electric models. Finally, the Chinese government is backing a number of electric car companies. Any one of those could emerge as a Tesla competitor.
The United Auto Worker has been sniffing around Tesla’s Fremont, Calif., factory and would love to unionize the workforce. That may be one of the reasons why Tesla is reportedly looking to Texas as a location for a second U.S. auto factory.
“It has long been our working assumption that as Tesla expands its manufacturing footprint, it too shall have a material portion of its production workers represented by unions. While this doesn’t necessarily prevent the company from achieving industry-leading returns, such developments, in the event they come to pass, could make investors question the company’s flexibility and competitiveness throughout economic cycles,” the analysts said.
“While we believe Tesla’s balance sheet is strong enough to weather the storm as it currently stands, we believe investors should consider the multitude of risks facing the company including but not limited to U.S./China relations, additional factory shutdowns, and global auto demand in 2020,” the analysts said.