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Tesla Motors Inc (NASDAQ:TSLA) to Push Battery Costs Below $40

Tesla Motors Inc NASDAQ:TSLA

Tesla Motors Inc is building a Gigafactory. Once in full-swing it will help to lower battery costs by 70 percent i.e. around $38/kilowatt-hour. Apart from the economies of scale, other factors helping the EV firm to lower the battery cost are improved chemistry, supply chain optimization and other reasons, said Jefferies analyst Dan Dolev.

Tesla Motors Inc NextEV Challenge

In-line with Tesla Motors goal

In a note last week, Dolev raised the price target on the stock to $365, mainly due to the firms battery business. The analysts notes that the forecast from the firm of around 30 percent cost saving was very “conservative.” Dolev says that the current Model S battery-pack costs around $250/kWh, and the firm could bring it down “to ~$88/kWh and the pack-level cost to ~$38/kWh.”

“The Gigafactory, which is expected to begin production in early ’16, should drive down pack-level costs by 70% to ~$38/kWh via economies of scale, supply chain optimization, increased automation, and production domestication,” Dolev said.

Even a 50% saving on the cost can help Tesla Motors Inc to up its gross margin by 1,000 bps by 2020. Improved financials could help the firm with a smooth roll-out of the Model 3, which will cost $35000, almost half the cost of the Model S.

Right now, Tesla Motors battery packs make up 21 percent to 22 percent of the car’s ASP, but after the cost cuts, it will come down to 12-13%, says Dolev. Such savings will help Tesla Motors to enjoy gross margin at par with the OEMs. Based on such a scenario, Jefferies has raised the gross margin estimates for Tesla.

Such a scenario appears in-line with the firm’s goals. Tesla Motors, which is operating at a loss for now, aims to make profits by 2020, when it expects to sell half a million cars per year. Such a target looks doable as the firm will become a major player in the battery industry once its massive battery factory comes into existence.

Battery solutions in Australia

Meanwhile, Tesla’s home power solution Powerwall will be launched in Australia later this year. Similar to a Model S battery, Powerwall is a rechargeable lithium-ion battery, the only difference is it will be mounted on the wall of a house.

Tesla Motors will be offering a 7kWh Powerwall standard model for an average household. It will also sell 10kWh version, along with packs for commercial and utility use.

On Monday, Tesla Motors Inc shares closed up 1.37% at 264.20. Year to date, the stock is up almost 19% while in the last one-year, they are up almost 2%.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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