Tesla Motors (NASDAQ:TSLA), the electric vehicle manufacturer in Silicon Valley, signed a long-term agreement earlier this week with Panasonic Corporation (NYSE:PC) on supplies of automotive-grade lithium-ion battery cells.
A leading supplier to the worldwide automotive industry, Panasonic has guaranteed Tesla more than 80,000 batteries over the next four years to be used in their new premium sedan offering, the Model S. Tesla is gearing up for an aggressive roll-out of the Model S in 2012, which already has 6,000 reservations, and the guaranteed supply of batteries ensures that Tesla’s ability to deliver on their projections.
Tesla and Panasonic have been close collaborators for years, working together to develop automotive-grade battery cells based on Panasonic’s nickel-type cathode technology and increase the market popularity of electric vehicles.
Cost Stabilization and Profit Potential
The guaranteed supply of batteries stabilizes the cost of manufacturing the Model S. With the largest cost contributor set, Tesla will be able to ensure that the lower price point for this new offering ($60,000 versus $100,000 for the Roadster) still meets investor’s expected rate of return.
The current Trefis price estimate for Tesla is $39.28, a 40% premium above market price. However, even a small increase to the Gross Profit Margin for Tesla over the next two years would give the stock and even higher upside potential.
Furthermore, since batteries are the rate-limiting factor in both the production and the popularity of electric vehicles, the continuation of Panasonic’s commitment to the industry could have an upside effect on Tesla’s stock. Skeptical consumers may also be reassured by Panasonic’s involvement, with the increased confidence spurring additional pre-order sales of the Model S. The Trefis analysis show that 88% of Tesla’s stock price is contributed by the sale of electric vehicles.