I will be the first to admit that Elon Musk’s newest project, solar roof, looks quite amazing. And as explained on BNL Finance, there is real potential for solar roofs to create long-term shareholder value as Tesla Motors Inc (NASDAQ:TSLA) becomes a more diversified company with several high-growth projects.
Still, the market does not seem to be buying it, as TSLA stock fell more than 1% in response to the news.
That’s because there are serious, structural issues with Tesla’s proposal. And with Tesla stock supporting a nearly $30 billion valuation, investors know that Elon Musk has to hit a home run if TSLA stock is going to trade higher over time.
Tesla Motors’ Solar Roof Problem
First and foremost, solar tiles have been around for a long time. What Elon Musk has done is not reinvent the iPhone wheel. The big bet here is that Elon Musk can market the idea better.
Historically, panels are added to the roof, and only on the side of the home that faces the sun for more of the day. Musk’s theory is that panels need to be the actual roof, and need to be durable, cost efficient and beautiful.
He is probably right, and that is why many think that Musk will succeed where so many have failed.
Nonetheless, Musk claims that his tiles are only 2% less efficient that panels, but panels vary in efficiency, so we don’t yet know what “panel” that Musk is comparing his tiles too. Fact is there could be a huge gap between the performance of TSLA’s solar roof tiles and that of the best panels.
Regardless, since Tesla stock’s move is a direct aim at consumers, perhaps the biggest problem is that solar is not yet cost-effective.
We are talking about solar tiles that will replace one’s roof, as well as a Powerwall to store solar energy (the new Powerwall 2 runs $5,500), and installation costs are typically higher than the product itself. Solar companies try and offset the high costs of solar power with low prices and subsidies, but fact is that solar is not yet on a level where it compares to the low cost of other energy sources.
This means that consumers are upside down on their investment for years, especially if tiles are far less efficient than the best panels and require higher installation costs due to the need to cover more square footage — all of the roof versus part with panels.
TSLA the next AMZN?
All things considered, Amazon.com, Inc. (NASDAQ:AMZN) has become one of the most valuable companies in the world because Jeff Bezos has shown an innate ability to disrupt and even control any industry he enters. Some think Musk is similar, and that he will do the same with solar.
While possible, the most noticeable difference is that Amazon had the benefit of economies of scale. Hence, Amazon.com was successful because it offered consumers a cheaper way to buy books and merchandise, or for businesses to manage their organization through the cloud.
This is not the case in solar, especially residential solar. Amazon.com never had to compete against an essential commodity price — the price of electricity. Historically, technology reduces costs and improve the livelihood of consumers. Tesla’s solar roof does not — no cost savings except subsidies that are supposed to save the consumer money.
In other words, I am not sure that consumers will buy solar roofs because it is cool, green, and Elon Musk built it. Maybe they will, but I don’t foresee it until the economics improve.
As of this writing, Brian Nichols does not own any of the aforementioned securities.