Tesla Motors Looks to the Future with $5 Billion Battery Factory

Tesla Motors TSLA announced on Wednesday that it plans to offer a $1.6 billion convertible debt offering to help finance its highly anticipated “gigafactory.” According to Tesla's official blog, the gigafactory is intended to produce more lithium ion batteries on an annual basis in 2020 than were produced worldwide in 2013. The estimated cost of this first of a kind factory is estimated to be $5 billion. According to Forbes, Tesla plans to invest upwards of $2 billion by 2020 with partners and potential strategic investors such as Panasonic covering the remaining costs. The factory is expected to employ 6,500 workers and according to The Phoenix Business Journal, the company is considering locating its factory in Arizona and other places in the Southwest. Tesla intends to power its factory with solar and wind power and needs up to 1,000 of space leading Forbes to speculate possible locations could also include New Mexico, Nevada and Texas. Tesla is likely to maintain a factory close to its head offices in California to minimize transportation costs.

Check out some details about what the Gigafactory will look like: http://t.co/L90AIYv8R8 pic.twitter.com/i5mEwMjFKA

— Tesla Motors (@TeslaMotors) February 26, 2014

Few other details are known at this time except that Tesla is expecting the factory to produce enough batteries for 500,000 vehicles by 2020 as the company will introduce its “mass affordable” Gen III electric vehicle with a price tag of $30,000 to $40,000. By comparison, in 2013 Tesla delivered a total of 22,477 vehicles. Craig Irwin, analyst at Wedbush views Tesla's gigafactory to play a large part in the company's future success and raised his price target on shares to $295 from a previous $253 while reiterating an Outperform rating. To derive at the $295 price target, Irwin uses a 30.0x multiple on his estimated fiscal 2017 EPS of $12.00, discounting back two years using a 10.0 percent discount rate. A two year discount period is appropriate given new information on Tesla's gigafactory which was not widely available in the past. A 30.0x multiple is “fair” as Irwin expects Tesla to double its earnings by that point. 2017 estimates are appropriate to use as that is the first year that the Gen III vehicles are expected to scale. “We see strong positives in Tesla's credible path to longer-term battery cost reduction and the Gen-III vehicle target costs, and what we believe will be a receptive buying public willing to purchase EVs while retaining reasonable expectations for these vehicles,” Irwin wrote in a note to clients on February 27. “Tesla's multi-year lead over credible competition suggests the company is well positioned to deliver an aggressive volume ramp.”