Tesla Battery Day primer: Can Musk deliver as TSLA rallies on event hype?

Equities

Tesla Battery Day primer

  • Battery Day event scheduled for Sep 22nd
  • Signs of speculative buying ahead of event
  • Elon Musk hints at more energy dense batteries

Investors are charged up with excitement ahead of Tesla’s Battery Day event. Shares have rallied about 25% in the last week after the stock tapped on the 50-day simple moving average following some heavy selling in the middle of the Nasdaq’s early September pullback.

This of course followed disappointment at missing out on S&P 500 inclusion, and some very aggressive bid that took place in and around the stock split. So is Battery Day all hype, or is there something to it?

Tesla’s 2020 annual meeting of stockholders will be held on Tuesday, September 22, 2020, at 13:30 Pacific Time. Immediately after this meeting, Tesla will hold the Battery Day event.

CEO Elon Musk, in his usual caution, said in January that the event will ‘blow your mind’. Recently he toned it down a bit, teasing ‘many exciting things’. Whilst we should always take his pronouncements on Twitter with a pinch of salt, clearly there is a high degree of expectation and speculation – and speculative buying of TSLA stock – taking place in the run-up to the event.

Batteries matter

To deliver on its EV promise, Tesla needs to own the battery space. Without this, it’s not so different to an OEM. Musk commented on this at Tesla’s Q4 2019 earnings call in January, explaining that in order to ramp up Model Y production, introduce the Cybertruck and launch the Semi electric truck, a lot more batteries would be needed.

“So, the thing we’re going to be really focused on is increasing battery production capacity because that’s very fundamental because if you don’t improve battery production capacity, then you end up just shifting unit volume from one product to another and you haven’t actually produced more electric vehicles,” Musk said.

And whilst Tesla has a lead in the powertrain stakes, traditional players may catch up. “It’s worth noting that the Model S has like a 100 kWh pack, the [Porsche] Taycan has like a 95 kWh pack. The Model S is steadily approaching 400 miles of range. The Taycan has 200 miles of range. So we must be using that energy pretty efficiently, and the powertrain is a big part of that,” Musk added in January.

Whilst battery production is one thing, making the batteries more efficient is quite something else. Tesla’s acquisition of Maxwell, an ultra-capacitor manufacturer and battery technology business based in San Diego, is a considerable factor.

What to expect from Tesla’s Battery Day

My expectation is that Musk is about to announce if not a leap then a progression in battery technology that brings EV costs down to, or close to, traditional automobiles. It would be a surprise if Tesla were not able to say it has made further progress on batteries that are more energy dense and have a longer life.

We note for example, that on August 24th this year Musk said battery cells of 400 Watt hours per kilogram (Wh/kg) with a high cycle would be possible in volume within 3 to 4 years, way beyond the current 260 Wh/kg in the Model 3, which could indicate knowledge of some improvement coming in the Tesla batteries.

There has also been speculation that Tesla may unveil “silicon nanowire anode” technology that can greatly increase battery density and cell life. All of this remains speculation, of course.

If Tesla can both lower costs and increase battery energy density and life, it would be a significant step forward for the company and further cement its lead in the EV space. However, given the recent rampant speculation on the stock and Musk’s capacity to somewhat overstate his case, there is a considerable risk of a buy-the-rumour, sell-the-fact trade.

Tesla Stock Signals

Whilst client flows remain positive (87% bullish), analysts remain downbeat – the average price target of $300 vs the current $450 for the stock implies a 34% downside. We also note that hedge funds have been decreasing their holdings.

Baillie Gifford, one of the top shareholders, recently reduced its stake as the holding approached fund limits, but also because of fears that valuations had just got silly. Our insider signals tool also delivers a sell signal on the stock.

Where next for TSLA after Musk’s ‘price is too high’ tweet?

Equities

Tesla CEO Elon Musk knocked $14 billion off the value of his own company on Friday after tweeting that he thought the stock price was too high.

Musk posted “Tesla stock price too high imo” during a bizarre tirade of messages, that included railing against lockdown and sharing lyrics to The Star Spangled Banner. TSLA dived over 12% in response.

Musk is no stranger to expensive tweets. He had to pay the US Securities and Exchange Commission $20 million in 2018 after posting that he was planning on taking the company private again. He suggested a premium of $420 and that funding for the move was secured, causing the stock to leap over 6%.

The SEC alleged that, “in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies.  Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.”

Tesla was also required to pay a $20 million settlement, remove Musk from the board, and implement new procedures and controls with regard to the CEO’s Twitter account. An in-house lawyer for Tesla is supposed to approve his tweets relating to company financial matters.

Musk breaks SEC settlement guidelines with TSLA tweet?

These controls clearly weren’t working too well on Friday – in response to an email from the Wall Street Journal asking if the messages had been authorised or vetted, Musk simply replied “No”.

Is Musk facing another spat with the SEC? Potentially. It’s unclear whether commenting on the stock price counts as a ‘financial matter’, and therefore whether it should have been vetted before it was posted. However, if the SEC deems that it does count, Tesla’s board of directors could also be in trouble, as it’s the company’s responsibility to see that these compliance procedures are followed.

A small fine here or there is nothing a billionaire need concern himself with, but the danger for shareholders is that the CEO and the board need to be on top form during these extraordinary times. The last thing a company like Tesla needs is for its CEO to be fighting with the US authorities – or the board of his own company.

Where next for Tesla shares?

Tesla shareholders have always had to contend with Elon Musk’s erratic behaviour.

In October 2013 he claimed “the stock price that we have is more than we have any right to deserve” while opening a new showroom in London. He told reporters in September 2014 that “I think our stock price is kind of high right now, to be totally honest”.

In February 2015 Musk took a different angle, claiming that Tesla could reach the same market capitalisation as Apple had ($700bn at the time) within 10 years. He repeated the claim in May 2017, but a couple of weeks later was back to stating that the current market cap was “higher than we have any right to deserve”.

Even if Musk and Tesla escape repercussions from the latest tweet, this is just the latest in history of tweets from the CEO on the company’s share price. Traders and investors need to be prepared for unexpected surprises.

Find the latest Tesla ratings with Analyst Recommendations

Tesla currently holds a consensus “Neutral” rating amongst Wall Street analysts and the average price target of $621.33 represents a 14% downside on the current share price.

Many analysts updated their ratings on Tesla on April 30th – the day before Musk’s tweet about the share price. Check the Analyst Recommendations tool to see whether the CEO’s comments change the view on the Street.

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