It’s no surprise that one of the biggest winners from the sudden return of FOMO to financial markets is the world’s most divisive company: electric vehicle giant Tesla.
The numbers are staggering. Afterleaping almost 8 per cent on Tuesday night to $US993.98and rejoining the $US1 trillion ($1.34 trillion) market capitalisation club, Tesla shares have now surged a staggering 29 per cent in just six trading days.
Tesla founder Elon Musk is working on the third phase of his “master plan” and markets are excited. David Rowe
The return of risk-on sentiment - which has mind-bendingly coincided with the Federal Reservestarting what will be a long and potentially bruising rate hiking cycle- isn’t the only tailwind for Tesla’s stock.
The dislocations caused to energy markets by the war in Ukraine should also be positive for Tesla. As Credit Suisse analyst Dan Levy argues, sharp rises in oil prices should increase the urgency of the energy transition and broader shift to electric vehicles. “Moreover, while EV demand may increase, as we’ve noted in the past, EV uptake is now more a question of supply than it is demand,” Levy says. “And with near-term supply more fixed, increased EV demand may drive prices higher.”
Tesla has already lifted prices this year, with selling prices between 9 per cent and 28 per cent higher than a year ago.
But there is also a growing sense Tesla might be best placed to navigate what is a growing supply chain shock.
Morgan Stanley analyst Adam Jonas, who has a price target of $US1300 on the stock, argued last week that founder Elon Musk’s recent tweet that he is working on “Master Plan Part 3” was an indication that the various parts of the “Muskonomy”, including his infrastructure business The Boring Company and SpaceX’s Starlink satellite communications unit could be brought together.
But Jonas also floated the idea that Tesla could embark on the creation of a new business unit that he dubbed “Tesla Inside”, which would use the advantages Tesla has created in building crucial supply chain relationships (particularly with miners).
“Tesla has been assembling assets, tech and people to put them in position to potentially unveil a vertically integrated battery supply business that resets the industry cost curve. We believe many legacy OEMs would consider supplying batteries and other key EV technology,” Jonas says.
“In our view, the winners in the EV/internet-of-cars market will be those firms who have the ability to buy the commodities at the highest volume and be guaranteed supply. Unlimited capital and a network that gets better as it gets bigger are also critical ingredients. Within our coverage, we struggle to see who is better positioned than Tesla at this time.”
‘We actually need to see demand destruction’
A fascinating panel of analysts at Credit Suisse’s Asian Investment Conference on Tuesday rammed home the size of the supply chain crunch hitting the sector.
The Credit Suisse automotive team recently upgraded its forecast for EV penetration (as a percentage of total vehicle sales) in 2030 to 73 per cent, from 62 per cent previously and just 12 per cent in 2020.
But with higher EV penetration means a greater requirement for batteries, which make up about 37 per cent of the cost of materials in an electric vehicle. The bank’s base case is that battery demand will rise at a compound annual growth rate of 28 per cent between 2021 and 2030.
And that sort of demand means one thing for prices of battery raw materials such as lithium, which has already seen six-fold price increases over the last 12 months.
But Credit Suisse’s Australian energy guru, Saul Kavonic, says there is simply not enough of the stuff to meet the ambitious EV production targets global car giants want to hit, either now with existing capacity, or into the immediate future given proposed mines.
“Even if we assume every single project we can find happens, it’s not going to be enough to meet the targets of the car manufacturers for at least the next three years. And realistically we could see deficits of lithium all the way through to the end of this decade,” Kavonic told the panel.
“What that means is we actually need to see demand destruction. We need to see at some point car manufacturers say ‘we’re going to miss out on our EV targets, we’re going to lose the EV race to our competitors because we’re not willing to pay any more for our batteries.’”
Clearly, as Kavonic points out, this is a “very structurally bullish thesis for the lithium prices” with lithium producers set to be “the biggest beneficiaries over the next few years of the global EV rollout”.
But it also suggests a bullish thesis for established EV producers with established supply chains.
With demand getting stronger and supply becoming more constrained, Tesla should have the chance to push through further price hikes and pump up its already extraordinary car manufacturing margins, which sit at an industry-leading 30.6 per cent.
(20min delay)