Never let it be said that Tesla (NASDAQ:TSLA) doesn’t keep things interesting. Investors, whether they own TSLA stock or not, love to debate the merits of letting a relatively reckless visionary like Elon Musk remain at the helm of TSLA.
Following last month’s release of a relatively disappointing second-quarter report by TSLA, though, the prevailing discussion is once again shifting away from the company’s battery-powered cars and to its struggling energy arm.
Most observers appreciate the company’s efforts in the energy sector, but many critics question whether TSLA should be in the business at all. The unit doesn’t affect the organization’s results much right now, and more established solar names like SunPower (NASDAQ:SPWR) and SunRun (NASDAQ:RUN) seem far better positioned to connect with consumers.
Those doubters may well be right. But Elon Musk’s solar panel business and its closely-related battery/ energy-storage business are long-term project that are arguably just a few years ahead of their time.
At least TSLA will be ready when solar and storage really take off, assuming it survives its electric-vehicle production ramp-up.
Would TSLA Be Better Off Without Energy?
At the heart of investors’ frustration with the minimal catalyst Tesla’s solar and power storage business has offered thus far is 2016’s questionable purchase of SolarCity. Factoring in SolarCity’s debt, Tesla effectively paid on the order of $5 billion for a company that, at the time, was generating around $500 million of annual revenue.
How much solar panel business Tesla is doing now isn’t perfectly clear. SolarCity’s operation was folded into what is now categorized as energy generation and storage revenue, which includes sales of Tesla’s Powerwall for consumers and bigger Powerpacks for large organizations. The recently-introduced Megapack will appeal to utility companies, as it stores one gigawatt-hour’s worth of energy.
As it stands right now, however, the company’s energy-production and storage arm is relatively small and shrinking. That unit produced $368 million worth of sales during the second quarter, versus $5.4 billion in electric-vehicle revenue. Sales of solar panels and roofs fell 38% during Q1, year-over-year, and were off by 65% in Q2, Total energy revenues were off just a bit last quarter as well.
Meanwhile, EV gross margins are improving, coming in at 18.9% last quarter. By contrast, the margins of the company’s energy-related products were only 11.6%.
The numbers inspire doubts about the company’s solar business. As Joe Osha, analyst with JMP Securities, noted of the company’s energy arm “They’re just barely in the solar game. This business requires capital and focus, and at this point it’s not even clear who’s running it. They’d just be better off shutting the solar business down. It’s a distraction.”
He’s not alone in his view.
Elon Musk’s Vision
Musk’s bold vision has at times spurred ill-advised decisions. The company’s energy-related unit hasn’t been immune to his aggressive growth approach.
The foray into the solar -panel business with the acquisition of SolarCity was also a case of unfortunate timing. In 2016, the growth of U.S. solar installations slowed to only 16%, versus an average of 63% in the three years prior. In 2018, the market shrank by 2%, as U.S. government subsidies all but vanished.
It wasn’t the commercial potential of solar power — and the storage of it — that Musk was naive about, however. His failing, if there was one, was in determining how consumers and corporations would want to purchase solar panels, and when they’d be comfortable enough to do so without hand-holding.
Musk’s overarching vision has never just been about electric cars. It was always about moving the world in a green, carbon-free direction. Solar is the simplest and most effective means to that end. EVs were simply a way to get the ball rolling.
The boom of solar is inevitable. At some point, the world will run out of oil. The planet won’t run out of sunlight for a few billion years.
Timing Is Everything
The world’s not quite ready to take large steps in that direction, though.
Not unlike the mass closure of Tesla’s vehicle showrooms, the company recently stopped doing door-to-door sales of solar panel systems and ended its relationship with Home Depot (NYSE:HD). That decision coincided with the sharp dropoff of Tesla’s solar panel revenue.
Elon Musk is already responding, claiming earlier this year that 2019 will be “the year of (Tesla’s) solar roof.” Musk wants to expand the company’s factory in upstate New York, setting the stage for a production pace of 1000 solar roofs per week by the end of the year. Some question whether Musk will be able to meet that goal
Presumably, the ramp-up will be accompanied by an overhaul of the company’s sales efforts.
Even if only half that rate is achieved, it could still be a well-timed jump. Wood Mackenzie and SEIA predict residential solar power demand will rebound this year, following lulls in 2017 and 2018. The U.S. EIA forecasts that utility-scale solar power capacity will grow 10% this year and 17% in 2020 after a modest downturn.
That surge will definitely be positive for Tesla’s new Megapack. Continued education on the merits of solar power will help as well.
The Bottom Line on Tesla Stock
Energy is not a reason in and of itself to step into a new position in TSLA stock. As much as the company’s energy arm could grow now that it’s got a complete portfolio of solutions, TSLA will predominantly be about cars for the foreseeable future. Nobody disputes Elon Musk’s ability to ramp up production of solar panels. Most are still unsure he can do so profitably. That’s hurting TSLA stock
Most arguments as to why Tesla should abandon the energy-storage and solar market aren’t backed up by the data and the market’s outlook. The only exception to that is the contention that Elon Musk doesn’t need any more distractions,
And even the “distraction” contention falls flat. By that same line of reasoning, Musk should shutter or sell his SpaceX and Boring Co businesses as well. Neither is part of the operation that moves TSLA stock, but both certainly have the potential to consume Musk’s time and focus. But no one is suggesting that Elon Musk give up those businesses.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.