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Tesla's Batteries will be 56% Cheaper, but Wall Street Doesn't Care

Tesla announced that they will reduce the cost/kWh of their batteries by 56% and add 54% to their range over the next 3 years, possibly increasing the margin on their cars by 10% yet the stock is down after hours.

In its Battery Investor Day, Tesla announced that it is currently in the process of scaling production of newly designed batteries that are roughly 56% cheaper than their previous cells. Most of the concern around batteries in the EV industry is around the cost to make the batteries often measured in cost per kWh. Tesla does not publish the exact cost/kWh for its battery cells although most estimates put Tesla's current cost/kWh at around $158.

Source: CNBC

Most likely these estimates are fairly accurate because many of the material costs are known information so the production costs is where the guesswork is done. If these estimates are correct then Tesla's 75kWh battery pack costs them roughly $11,850 to make. If that cost is reduced by 56% that means that Tesla would be saving almost $6000 per battery pack, and by default per car. Tesla already has the highest gross auto margin in the industry at around 25%. This would likely increase that margin to roughly 33%. To put that into perspective, at Tesla's current production rate that would be an extra $600 million in gross automotive profit each quarter. This is huge for Tesla, not only will it increase their profitability, but if Tesla leverages this break through to reduce the cost of its EVs then other automakers won't be able to compete and might be forced to sell their EVs at a loss.

Tesla also announced a 54% increase in range which would mean the current 75kWh pack in the Model 3 could reach a range of almost 500 miles and would push the range of the 100kWh pack in the Model S and X to over 600 miles! This should easily eliminate any range anxiety that potential customers have left and make buying an EV even more of a no brainer. It also opens the door for Tesla to produce a compact vehicle with a 50kWh pack that could still have a range of over 300 miles.

Overall, the announcements at battery day will be huge for Tesla going forward and we're excited to see the company continue to grow and innovate!

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