Tesla (TSLA) has long been a battleground stock, as evidenced by its extremely volatile share action in recent years. But a breakthrough in battery and autonomous driving technology could finally build a true bull case for the company.
While many analysts trimmed price targets and urged caution from clients as shares declined nearly 14%, trimming about $8 billion from the company's market cap, some saw room for upside if it can press its lead in certain technologies.
"We continue to believe Tesla is fundamentally overvalued, but strategically undervalued," Morgan Stanley analyst Adam Jonas said to this point. "While we still expect near-term volatility in the stock to be driven by real-time data-points around demand in the U.S. and international market for Tesla's electric vehicles, we also expect discussions around the nature and value of the company's technology to be an important part of the narrative going forward."
The most important places for the company to highlight technological advancement in coming quarters will clearly be in both batteries and autonomous driving, as CEO Elon Musk's ambitious plans for robotaxis and lower-cost batteries remain at the back of bullish minds.
Better Batteries Could Charge the Stock
One of the key issues for a while at Tesla is its reliance on batteries supplied by Panasonic (PCRFY) and Musk's dissatisfaction with the power available in its current batteries.
Panasonic has noted that it might not be able to even supply the much-needed batteries at Musk's ambitious production rate.
"Batteries will run out if Tesla starts to sell the Model Y and expands its business next year," Panasonic CEO Kazuhiro Tsuga said on May 9. "What will we do then? It's one of a few topics to discuss with Tesla, including battery [production] in China."
As Panasonic runs the production lines at the gigafactories in the U.S., this is a headline issue and remains something Musk continues to tout.
"We increasingly believe the success of TSLA both medium- and long-term is dependent on its ability to drive cost out of its battery pack and optimize range to support gross profit per vehicle and volume of sales," Oppenheimer analyst Colin Rusch commented on Thursday. "We look to management to clarify its plans in this regard."
Musk pointed analysts and investors to the company's upcoming conference and strides it plans to make by next year.
"For Battery Day, we're going to do a comprehensive review of cell chemistry, module and pack, architecture, and a manufacturing plan that has a clear road map to a terawatt-hour per year," he told analysts. "The time for this probably is about six months like maybe February or March next year."
Even more ambitiously, Musk has even hinted at getting into the mining business as of late to further vertically integrate.
"As we scale battery production to very high levels, we have to look further down the supply chain and we might get into the mining business... I don't know. A little bit at least," Musk said earlier this year. "We do whatever we have to, to ensure we can scale at the fastest rate possible."
Much of Tesla's production depends on its ability to access batteries that rely on a supply of minerals such as lithium, nickel and copper. Much of these substances are expected to be in even shorter supply in coming years, possibly giving Tesla the kick it needs to assess the feasibility of directly sourcing materials.
Of course, one of the main issues for advancement in battery technology comes at the departure of its key battery expert, J.B. Straubel, the company's former chief technology officer.
Straubel is credited as a lead inventor on the company's patented battery cooling and mounting systems, fast charging system, and battery pack technologies, each integral to Tesla's success.
The upcoming battery and powertrain day will be an important insight into he company's technology that could cut costs and get a growth story back on track.
"Breakthrough in battery tech/cost improves gross margin to 30+% and delivers 10% EBIT margin," Jefferies forecast on Thursday.
Without Tesla's battery genius and its cutting of capital expenditures through the year, it will be important to hear what is achievable in the near and long term.
The other key technology that will need to be tapped into is what Elon Musk calls "full self-driving."
The technology is crucial for margins, which remain a lingering question for Tesla after significant price cuts.
"Achieving the low end of the FY unit volume guidance may make it difficult for Tesla to increase revenue sequentially... which begs the question of how auto gross margin can improve materially on flattish sequential revenues," Morgan Stanley's Jonas said.
The answer for margin movements upward appear to be strides in autonomous driving.
"On the gross margin point, the full self-driving is an extremely important part of the margin calculation, and the features for full self-driving -- only a portion of them have rolled out -- so, the revenue recognition on the full self-driving option is limited at first until those features roll out and also the demand for a full self-driving package is limited, because the features are mostly prospective instead of current."
"There's a significant margin potential for the existing fleet to upgrade to full self-driving, which most of the fleet can," he added.
Analysts have homed in on the effort as key to improvements as well, again awaiting more details to come in future quarters, especially related to non-Zero Emission Vehicle, or non-Zev, credits and full self-driving, or FSD, features.
"We believe Tesla's margin performance will be increasingly reliant on non-Zev credits and revenue recognition of its FSD feature suite (comes on at pure margin) whereas operational cost savings will likely only provide a small near-term benefit (labor, logistics, etc...)," Deutsche Bank analyst Emmanuel Rosner said. "Therefore, it will be important to monitor the roll out of upcoming features, such as Enhanced Summon and stop sign/traffic light recognition."
As everything is with Tesla, there remains a moonshot in view of some shareholders as well, including prominent bulls at ARK Invest who have touted strides toward full self-driving as the basis for roll outs of an autonomous Uber (UBER) and Lyft (LYFT) competitor.
"Given the $1 per mile price point and a 30% platform fee, Tesla could achieve software-like margins on its autonomous taxi platform, with 50% of net revenues flowing to operating earnings and roughly 70% of operating earnings translating into cash," a report from ARK Invest's Tasha Keeney reads. "The enterprise value of Tesla's autonomous taxi business would scale to $800 billion in the bear case for EVs and to $1 trillion in the bull case."
Still, some analysts questioned why this feature is necessary, even if it can drive such improvements as it might speak to an underlying unprofitable business at present.
"For many years, Tesla management has targeted an auto gross margin of over 25% in a steady-state," Jonas noted, adding that prior to Wednesday, "We don't recall Tesla management so clearly stating that such margins would be dependent upon the update of optional software upgrades that carry extremely high margins," including upgrades for cars already in the fleet.
Additionally, as Musk continues to push robotaxis out of forecasts, some believe that the autonomous features' capabilities are overestimated.
According to Consumer Reports, Tesla's Navigate function found in current models is no better than humans. The consumer protection group also noted that the feature cut off cars without leaving enough space and passed other cars in ways that violate traffic laws, forcing drivers to intervene to prevent the system from making poor decisions.
"The system's role should be to help the driver, but the way this technology is deployed, it's the other way around," Jake Fisher, Consumer Reports' senior director of auto testing said. "It's incredibly nearsighted. It doesn't appear to react to brake lights or turn signals, it can't anticipate what other drivers will do, and as a result, you constantly have to be one step ahead of it."
Given the scathing report, it would appear unlikely that regulators allow 1 million vehicles operated by the system to rule roadways across the country.
With the need not only to prove demand and profits, but also technological advancements, Tesla has quite a bit to prove indeed. Time will tell if any progress can in fact be made.
"Tesla has become the ultimate 'prove me' stock," Wedbush analyst Dan Ives advised.