Here’s Why Tesla’s New Battery Pack Is Significant For Its Future Growth

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Recently, Tesla Motors (NYSE:TSLA) unveiled a new battery for its electric vehicles which is capable of going up to 315 miles on a single charge. This range sets a new benchmark for automotive engineers who are trying to resolve “range anxiety” issues, as it brings electric cars in line with the range typically received in a gasoline powered car.  Tesla’s existing batteries give a range of around 170 miles from a charge that takes about 30 minutes. The company divulged the new power pack with the introduction of its Model S (P100D), which claims records for accelleration as well as range.  And with this technological breakthrough in place, Tesla canoffer this higher range battery in its less costly models as well.  Still,  the success of an electric vehicle, adequate infrastructure in terms of charging stations is critical.  As an increasing number of Tesla cars hit the roads in the next few years, its super charger network can face tremendous volume, which can be balanced with a battery having a higher range, reducing waiting time in these stations.  This development is an indication of Tesla’s innovative edge over competition and should attract buyers towards its higher end models in the long term.

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Competitive Edge For Tesla’s Model S

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Tesla’s Model 3 – its mass market moderately priced electric car received an overwhelming response, receiving  400,000 orders within a month of its launch. However, many consumers shy away from electric vehicles, primarily due to the paucity of charging stations relative to gasoline stations.  The long charging time and limited range per chargeare issues as well. As Tesla looks to expand its fleet of electric vehicles and grab a higher market share in this segment, it is critical for the company to eliminate “range anxiety” in order to attract a higher number of consumers towards its vehicles. While the new battery with 315 miles range is aimed to differentiate the Model S with the less expensive Model 3, the breakthrough is an indication of: 1) Tesla’s continuous focus on innovation; and,  2) Tesla’s competitive edge in the electric cars space as no other company producing electric cars is able to match this range.  Tesla has now set the bar very high for other electric car makers and defined itself as the leader in this technology.

According to our estimates Tesla’s  gross profit margin for Model S will be around 30% over our forecast period, much higher than the highest expected gross profit margin of around 24% for Model 3. We expect Model S to capture a 1% market share in the electric vehicles market by the end of our forecast period.

A higher market share for Model S can impact Tesla’s valuation significantly. Assuming the company launches new versions of  this Model S and through innovations claims a market share of around 1.4%,by the end of our forecast period, there can be a nearly 20% upside to our price estimate.

We believe Tesla’s ability to innovate and consequently provide its consumers with solutions for “critical” issues is its key advantage. Even as other automakers launch electric vehicles in future, as the automotive landscape undergoes a transition, Tesla will continue to retain its competitive edge with its focus on innovation.

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