A Model 3 ramp-up that resulted in a quarterly profit was a sign that Tesla's automobile business finally may be financially stable. If so, it is a good time for Tesla to turn its attention to the energy business — encompassing solar and energy storage — that has for long taken a backseat to getting the electric vehicle assembly line in order.
Elon Musk has been broadcasting this message since Tesla reported a surprise profit in the third quarter. On the call with Wall Street analysts after the earnings in November, the Tesla CEO said, "For almost two years we had to divert a tremendous amount of resources."
Now Musk claims Tesla is poised for "the really crazy growth for as far into the future as I can imagine. ... It would be difficult to overstate the degree to which Tesla Energy is going to be a major part of Tesla's activity in the future," he said.
Never one to shy away from bold claims or ambitions, Musk said Tesla Energy could grow to roughly the same size as Tesla's automotive business, and solar would grow, on a percentage basis, the fastest of any, with storage second.
"I think both over time will grow faster than automotive," Musk said. "They're starting from a smaller base." He added, "I think, especially, if you look at sort of — if you look at, like, year-over-year growth, it will be absolutely incredible ... over the course of, say, a year, gigantic increase."
In a recent internal email to Tesla employees, Musk outlined two critical year-end priorities: delivering all cars to their customers and boosting the rate of solar deployments by a significant degree.
Skeptics point to a variety of other reasons why Musk may be in solar- and energy-business salesman mode, beyond the Model 3 inflection point. The solar business has in recent years been associated with more negative than positive news. Tesla faces a lawsuit from shareholders over its controversial 2016 purchase of SolarCity; the solar roof that Musk has been touting for years is off to a slow start; its solar panel plant in Buffalo, New York, has been dogged by issues; and its solar business has faced unfavorable customer-service reviews.
Tesla did not respond to multiple requests for comment.
Industry experts and Tesla watchers are applying a heavy discount to Musk's energy claims, saying the Tesla chief is prone to hyperbole and exaggeration.
"I'd take all Elon claims with a grain, or metric ton, of salt," said Morningstar equity analyst David Whiston. "Energy probably stays a small piece of Tesla for a long time because there's so much growth to come in auto with new vehicles and AVs [autopilot]."
"I don't doubt there's a nice growth runway long term for solar," Whiston said, but added, "Like a lot of things in investing, it's a show-me story."
Analysts covering the rooftop solar sector estimate that it can grow from a low-end estimate of 10% annually to as high as 20%, based on the performance of the leading companies, such as Sunrun, SunPower and Vivint Solar.
"Tesla over the past two years has really taken their eye off the ball there, despite a visible brand. … The solar business shrank dramatically," said JMP Securities analyst Joe Osha, who covers both Sunrun and Tesla.
"Part of what maybe Musk thinks is they can come back and take market share and it would seem to me the EV business growing in the mid-teens as well, so maybe he thinks they can grow more quickly in solar because they can take share. We'll see. They are an amazing company and they've done some amazing things, but they really mismanaged that business."
KeyBanc Capital Markets solar analyst Sophie Karp said one issue Tesla may run into is the difference between selling solar and selling a car, where the brand Tesla has built is more persuasive.
"Solar is a product that is a push, not a pull; it is sold not bought," Karp said. "You can't just snap your fingers and have an overnight sales channel allowing you to grow 20% to 30% growth. It is really difficult to generate explosive growth in this space."
She added: "A Tesla car is like a Chanel bag. Rooftop solar is electricity … a complete commodity competing on price. Most people have zero idea whose panels are on their roof. Who cares? I'm not sure a charismatic leader can help sell that product.
"Maybe they can fix it, but they have not so far demonstrated that, and it requires a lot of management and attention. Sunrun has kicked their butts."
Analysts say Tesla's decision to let the solar business slip makes the process of returning to a No. 1 position in solar more difficult. "Tesla did not invest and made clear to everyone it would just run solar for cash flow … and not use as an area of growth," Karp said. "I would not be super worried about them being a competitor in the space anytime soon," Karp said, referring to companies like Sunrun and Vivint.
More from Powering the Future:
First US steel plants powered by wind, solar are coming online
Gates, Bezos invest in flow battery rival to Tesla's lithium-ion tech
How a massive Amazon wind farm is changing life in a rural American town
Tesla also has been dogged by reports of poor service in its solar business, an issue analysts pointed to as another challenge as it attempts to ramp up sales in solar and energy storage. "You do hear horror stories of the quality of customer experience. Solar has been pretty bad for the customer," Osha said.
Karp said many customers may feel that they have a higher chance of disappointing service with Tesla because of changes made after its acquisition of SolarCity, which limited customer support. Sunrun has a stronger customer service infrastructure because solar is its main business.
Tesla's 43 MW of solar installations in the third quarter of 2019 was an improvement on the 29 MW of solar in the second quarter, but it still remains considerably lower than the 93 MW in sales in Q3 2018 and nowhere near the more than 200 MW installed by its solar division (formerly SolarCity) in a single quarter at its height.
Tesla said in Q3 that solar deployments rose by almost 50% over last quarter, and energy storage deployments, which include Powerwalls and Powerpacks, grew by 15% to an all-time high of 477 MWh.
The company refers to a "relaunch" of its solar business this year, with a simplified process and goal of fast order-to-install timelines, including a less cumbersome permitting process across 350 cities.
Tesla Energy supplies power to homes, businesses and utilities by selling solar panels, solar roofing and battery storage packs called the Powerwall, Powerpack and Megapack. In 2018, Tesla installed more than 1 GWh of storage capacity around the world. This year the company aims to double that capacity to 2 GWh.
"I think there is generally a lack of understanding or appreciation for the growth of Tesla Energy," Musk said on the recent earnings call. "In the long term I expect Tesla Energy to be of the same or roughly the same size as Tesla's automotive sector or business."
Gene Munster, founder and managing partner at Loup Ventures, said investors should view Tesla Energy more as an optionality to the auto story. "Energy is currently 10% of the revenue, and most investors believe the energy business will remain 10% of revenue" for the foreseeable future, he said.
Even longer term, Munster argued energy would remain 20% to 25% of Tesla's overall business, considerably "below Musk's 50% target."
If Tesla wants energy to be a larger component of its business mix, they need to sharpen their focus on tech innovation and improve affordability, said Vivek Wadhwa, a distinguished fellow and professor at Carnegie Mellon University Engineering. "The fact is that Tesla's foray into solar panels and storage has been a disaster so far," he said. "They have not met the expectations they set, and the costs of their technologies have been too high."
Both in terms of pricing and technology, Wadhwa expects Tesla's energy business to follow an evolutionary curve similar to that of the auto story. Tesla has had to overcome many technological failures and pricing hurdles to be where it is today with EVs. "When they fixed things, they disrupted the entire industry," said Wadhwa.
Craig Irwin, an analyst with Roth Capital Partners, which has a sell rating on Tesla, expressed similar concerns around battery pricing, which he said would have a large bearing on the size of the energy business. "Tesla's battery cost today at the cell level is about $200/kWh, and when they build their energy projects, it's a little bit higher than that," he said.
Irwin said energy storage affiliates of global conglomerates provide stiff competition and, so far, are ahead of Tesla in terms of total energy installation numbers. These include Fluence Energy, which is owned by Siemens and AES; NEC Energy Solutions, which is controlled by Japanese parent company NEC; China's BYD — which includes Warren Buffett's Berkshire Hathaway among its longtime shareholders — and GE's energy storage business.
AES and NEC have been doing utility-scale batteries longer than Tesla has been in existence. These firms, focused on the large-scale utility project market, don't compete much with Tesla today, but that could change in the future. AES has said that as much as 50% of current project requests in the U.S. market include the requirement of energy storage. A little under 25% of project awards it recently announced included energy storage.
Tesla is building massive "gigafactories" to produce lithium-ion batteries for electric vehicles and Tesla Energy's storage solutions business, including its newest Gigafactory 3 in Shanghai, China. GM just announced a multibillion-dollar investment in a lithium-ion battery plant in Ohio.
At the same time, there are battery start-ups receiving investment from some of the world's richest individuals, including Bill Gates and Jeff Bezos.
Falling battery prices could create a tailwind for leading global energy storage companies, including Tesla. Over the past decade, battery prices have fallen roughly 87%, from $1,100/kWh in 2010 to $156/kWh in 2019, according to research firm BloombergNEF. It predicts average prices to fall further, to $100/kWh by 2023.
Tesla's energy would take a few more years before it really got going. "I'd say it'd take two to three more years, but Tesla will get its solar capture and storage technologies to where we expected them to be a year ago," Wadhwa said.
Tesla was, in Elon Musk's words, "cell-starved for vehicle production," which forced the company to switch its Powerwall production lines to vehicle battery lines.
Osha said that's an ongoing problem. "Tesla has enormous volume and can divert some to Powerwall should they choose to do so, but then they are starving the car business, which is the higher-return business," Osha said. "Look at Sunrun. They are losing money on Brightbox," he said, referring to its energy storage product, though he added these companies are working on ways to monetize these assets over time.
Tesla has an advantage on the energy storage side of the market if its effort to build huge battery gigafactories leads to major efficiencies in cost of production, which would allow it to generate higher margins than competitors like Sunrun, which need to source battery cells from partners like LG Chem. But Tesla already has had to divert battery production to the cars rather than storage products like Powerwall.
"The margins are really a thing, and the battery for an electric car is a higher-margin product compared to rooftop solar with storage," Karp said.
"A more mature company does not have to make these trade-offs," Morningstar's Whiston said.
Whiston said Tesla will remain primarily an auto manufacturer with vehicles representing "a much bigger revenue piece than energy" for the next few years. "The lower base for energy may mean larger percent deltas for energy, but that doesn't make Tesla a solar company over a high-tech car company," the Morningstar analyst said.
Tesla's drive for vehicle automation represents a better opportunity than energy for investors looking to ride the second Tesla wave, said Munster. "The second wave will be full-self driving (FSD), and the third opportunity is energy," he said.
"I am a big fan of what Tesla has accomplished, but we need to be sober and look at things [with regard to Tesla Energy] from the lens of realism," Irwin said.
Musk has spoken about the lack of focus on the solar business: "For about 18 months, almost two years, we had to divert a tremendous amount of resources. We had to basically take resources from everywhere else in the company and apply them to the Model 3 production, fixing the Model 3 production ramp and simplifying the design of the Model 3."
"For about a year and a half, we unfortunately stripped Tesla Energy of engineering and other resources and even took the cell production lines that were meant for Powerwall and Powerpack and redirected them to the car because we didn't have enough cells," Musk explained on the recent earnings conference call.
But on the third-quarter call, he said the company has "restored resources" to Tesla Solar and storage.
"If we didn't solve Model 3, Tesla wouldn't survive. So, unfortunately, that shorted pretty much the other parts of the company," Musk said. "But it would be difficult for me to overstate the degree to which I think Tesla Energy is going to be a major part of Tesla's activity in the future."
He said that in addition to vehicle production numbers, the company will publish data on how much sustainable energy Tesla produces, or Tesla customers produce with its products, though he did not provide a specific date for that metric's introduction.
"I think you'll see that we're producing about the same or comparable amounts of sustainable energy as are consumed in the car," he said.
That belief refers to a key criticism of the current electric car reliance on many utility sources of power that remain fueled by coal and natural gas. "For the longest time the rebuttal against electric cars is, like, don't they use dirty power from coal?" Musk said. "Tesla's overarching strategy here is effectively to become a giant distributor global utility," he said.
"We will eventually arrive at the point of these virtual power plants competing with traditional utilities," Karp said about where the energy storage market is headed, but she pointed out that a requirement is having density of energy assets in a particular area. That's one reason there has been a lot of focus on California. "You need an organized energy market for that to work. You can't do it in North Carolina."
California will also become the first state to mandate all new homes be built with solar starting next year, which plays into Tesla's effort to grow the solar roof business.
She said companies like Tesla will try to go after some of the traditional utility investment — Tesla already has a small utility-scale energy storage business — but the uptake will be slow because of the need for critical mass in one area.
—Additional reporting by Eric Rosenbaum