EVs without rare earths - time to own Tesla again?

Tesla stock has been staging a recovery from its year-to-date lows, but sentiment for the stock remains shaky as Elon Musk focuses on Twitter and tech stocks falter. Are rare-earth free batteries a game-changer?

Elon Musk’s ongoing Twitter drama is capturing the headlines. Still, the cornerstone of his empire had a revolutionary announcement this month during its annual Investor Day: the literal driver of its electric vehicles (EVs), the permanent magnet motor, no longer requires rare earth elements.

The mechanics behind motors are as obtuse to most retail investors as the difference between neodymium and praseodymium (both components of existing engines, if you're curious). The seemingly banal development is nothing short of revolutionary and could represent a sea change for the battered stock price if it bears fruit. 

Tesla price chart

After its jump from 2023 lows, the stock sits at a potentially critical juncture. A break of $200 zone could catalyse a new uptrend, but a failure could set up the next leg of the current downtrend.



Source: FlowBank / TradingView

Motors and metals matter

For the mechanically disinclined, don't worry. Detailing differences between permanent magnet motors made of rare earth metals and those that aren't is beyond our expertise. Besides, the fundamental and financial ramifications of the move are far more interesting. 




EVs aren't the only consumer of rare earth metals; they're found in devices you use daily, like cell phones and computers. But the sheer scope of the metals that the EV market demands dwarfs those supplied to other industries. Independent research firm Adamas Intelligence estimates that EVs account for more than 10% of global rare earth metals demand. Tesla takes the lion's share of that cut due to their sector dominance.

But using and relying upon rare earth minerals has a crucial flaw: much of the critical compounds are sourced from China or via China as a regional broker for mining companies in Myanmar and other less-developed regions. We're still reeling from supply chain shortages post-pandemic, from housing to energy, and 2022’s devastating chip shortage caused by strict national COVID-Zero policies and political tension is still fresh in our memory.

If Tesla can break the dependency on Chinese supply chains, especially as the metals markets prove as volatile as energy pricing, the cost savings from transportation and tariff costs alone are massive and far offset any R&D costs they incurred to get to this point.

Furthermore, reducing dependence tightens Tesla's total logistical footprint. By increasing vertical integration, they cut costs as sourcing and manufacturing materials are possible domestically, assuming the new motor is a ferrite magnet derivative (ferrite is a ceramic created by heating and blending common metals like iron and zinc). This move may also bring Musk, and Tesla, by association, back into the media's good graces as the concept aligns wholly with the Biden administration’s plan to bring manufacturing home.



Tesla also benefits from an ESG perspective, as a major flaw in touting EVs as a solution to environmental concerns is, again, sourcing. No matter the specific mine or regional ecological mandate, the environmental impact of digging these metals from the ground far outpaces the benefit of reduced fossil fuel consumption on a per-vehicle basis. 

While Musk decries ESG as a “scam,” a core constituency of investors, retail and institutional alike, prioritize ESG figures over fundamentals. Tesla could use an ESG bump after falling off the S&P 500 ESG Index in 2022, and improved environmental impact might be the boost Tesla needs. 

Tesla’s outlook

Tesla took a lot of flack for inflated valuation and stock prices the past few years, often lumped into the categories of unprofitable or unsound tech firms burning cash faster than they made it à la the Dot-Com era. 

But, from our perspective, Tesla was and is a fundamentally sound company with room to grow. That makes its recent repricing alongside the truly bad moonshot companies that fell to Earth as rates hiked misaligned. In fact, it seems undervalued today even before accounting for the new efficiencies they’re projecting by moving away from rare earths. 

Even the big-name institutional rating agencies agree as they determine Tesla's credit risk is lower than last year and push its debt into investment-grade territory. 

If you need a bit more justification, let's dive into some quick fundamentals: 

  • Musk and the team will unlikely face truly formidable competition from either new entrants or established manufacturers in the next decade. Tesla's moat is as narrow as it comes due to its extensive proprietary technology and other intangible assets. That moat narrows further if they cinch the planned transition away from rare earth minerals, leaving competition scrambling into pricy R&D to find alternatives that don't violate Tesla's IP.
  • Tesla remained consistently profitable over the past few years, doubling its EPS in 2022 despite economic headwinds. Recurring profitability during economic volatility points to their diversification strategy emphasizing affordability and luxury channels paying off:
    2020 EPS: 0.252021 EPS: 1.872022 EPS: 4.02
  • Tesla took advantage of rate cuts to retire debt, one of the reasons they saw an improved credit outlook, and has a 08 debt-to-equity ratio compared to December 2019’s 1.91. Vehicle manufacturing firms often carry heavy debt compared to other industries since they must source parts on credit before selling a complete car. Hence, anything less than 1 is staggering compared to, for example, Ford's current 2.08 ratio 
  • Tesla also has a war chest of $22B in cash, so they're well-positioned to react to changing circumstances as they occur.

In short – a healthy operational outlook coupled with robust financials means Tesla could be poised to manoeuvre through short-term volatility while building an improved position to capitalise on a rebounding economy. 


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