Why Tesla's Battery Day Is a Big Deal

Jon Markman

Tesla ((TSLA) -Get Report) is holding its annual shareholder meeting after the close today but traders are more interested in an announcement about battery technology. Here is why Battery Day is a big deal.

For almost a year, analysts have been promoting today’s event. In a television interview Tuesday, Dan Ives, an analyst at Wedbush Securities, said a new battery technology at Tesla is a paradigm shifter.

He’s right. It’s the reason Tesla shares are up 400% this year.

Elon Musk, chief executive officer, knows what is at stake. He tried Monday in a Tweet to tamp down enthusiasm for Battery Day. Musk wants investors to understand that the new batteries are mostly intended to be used in three vehicles that have not yet been released: Tesla Semi, Cybertruck and Roadster. Also, Musk does not expect high volume production until 2022.

Nevertheless, those new products have won the hearts and minds of the target audience.

For example, the Semi prototype, a reimagined long haul Class 8 truck, was revealed in November 2017. Musk claimed the vehicle would have best in class towing power, 400 miles of range at full load and could be recharged to 80% in as little as 30 minutes. At $180,000, the truck seemed like a bargain, and preorders from the likes of FedEx ((FDX) -Get Report), PepsiCo ((PEP) -Get Report) and Walmart ((WMT) -Get Report) piled up.

Car and Driver reported in 2018 that Semi orders reached approximately 2,000 units.

The problem is that making those trucks requires an big advance in battery technology. Most electric cars use lithium ion battery technology. This is the same tech used for smartphone batteries. It’s preferable because it offers good high temperature performance, and packs a lot of energy for the weight of the battery.

A higher power/weight ratio is vital for electric vehicles. The math is simple: The less weight a vehicle has to carry, the further it can travel per charge.

Electric vehicles are already much cheaper to maintain because they have so many fewer moving parts than cars powered by internal combustion engines. The complete Tesla drivetrain has only 17 moving parts, vs 200-plus for most ICE vehicles. Often Tesla maintenance is possible with software adjustments alone.

Those software updates, coupled with the instant torque from highly efficient electric motors, also lead to better performance. The internet is full of videos of stock Teslas blowing away expensive European supercars and hopped up American hot rods.

Better battery packs would put the longevity of Teslas on par with its inherent advantages from electric propulsion. In typical Tesla fashion, the new batteries are not just better, they are an exponential upgrade. In the past Musk has talked about a battery that could last for 1 million miles; at present, batteries last around 160,000 miles. A million-mile battery would profoundly change the economics of Tesla as a business.

When EVs hit the mass market in 2010, the cost to manufacture lithium ion battery packs was approximately $1,000 per kilowatt-hour of storage. By 2019, manufacturing costs were down to $187 per KWh. A million-mile battery will push the cost per KWh below $100, while providing more range per charge.

It would also give Tesla business managers new options. The company could maintain current pricing and fatten profit margins, or cut prices and take dead aim at the entire ICE marketplace.

A Deloitte study in 2018 found that EV pricing, followed by driving range, were biggest obstacles to widespread adoption.

Tesla is already best in class for EVs in terms of battery performance and reliability. The company offers 8 year, 160,000 mile warranties on all of its new vehicles. Other automakers have struggled to build battery packs that can match range and longevity. A million mile battery would tip the scales in favor of Tesla completely.

It would also make ICE vehicles seem like a dumb choice by comparison. Gas guzzlers simply do not last for 1,000,000 miles.

We still don’t really know what Musk is going to say at the battery event later today, however any headline that includes “1 million mile” is likely to sit every well with the analyst community. The stock could make a new high quite quickly.

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