Can SolarCity And Gigafactory Supercharge Tesla Stock?

  • Tesla is pivoting towards the overall energy sector and is trying to become a leading integrated clean energy provider.
  • The recent launch of the Gigafactory and the acquisition of SolarCity are clear indicators of Tesla's strategy.
  • The clean energy business is likely to become at least as big as the car business in the long term and plausibly bigger.

Tesla (NSDQ:TSLA) has been recently all over the technology and financial news for its initiatives aimed at becoming a leading player in the energy sector. It appears that the company is pivoting from its original luxury electric cars niche to the overall energy sector, and trying to become a top integrated clean energy provider.

The Gigafactory, Tesla's huge manufacturing plant for electric batteries and storage systems in the Nevada desert, opened its doors a few weeks ago. Tesla needs the Gigafactory to mass-produce batteries for the low-cost Model 3, the first Tesla car for the consumer market, which has been pre-ordered by 350,000 customers and is expected to make or break the company. The involvement of Panasonic shows that Tesla's energy storage products will have applications much beyond cars. Tesla founder and CEO Elon Musk thinks Telsa’s Powerwall (consumer) and Powerpack (industrial) energy storage solutions, both assembled in the Gigafactory, will be important drivers for Tesla's growth, as CNBC reports.

Musk noted that improvements in manufacturing facilities with the economy of scale can deliver more performance enhancement per dollar than improvements in component design, and added that the energy storage business will probably be as big as the car business in the long term. "And will actually have a growth rate probably several times that of what the car business is per year," he said. "The growth in stationary storage is really under appreciated. That's a super-exponential growth rate."

In related news, Tesla proposed in June to acquire all of the outstanding shares of clean energy provider SolarCity (NSDQ:SCTY) common stock. SolarCity, which is the leading solar energy provider in the US, announced that it had formed a special committee of independent directors to evaluate Tesla's proposal. Then, as reported by The Wall Street Journal, Tesla revealed that it had reached a deal to buy SolarCity for less than the price it had originally proposed.

The deal values SolarCity at about $2.6 billion. SolarCity stockholders would receive 0.11 share of Tesla for each share of SolarCity, which is below the original range of $26.50 to $28.50 per SolarCity share that Tesla had proposed in June. The deal would double Tesla’s workforce to nearly 30,000 employees and create a unique combination of solar, power storage and transportation, which Tesla says would be the world’s only integrated sustainable energy company. According to Musk, the deal will accelerate Tesla's ongoing transition from electric vehicle automaker into a fully integrated, renewable energy products company.

"[The] entire deal is actually driven by a need to bring together the products on the factory and the solar side to create an integrated product for the end-user," said Musk in a conference call and webcast hosted by Tesla and SolarCity on August 1. "The end-user being all the way from the individual to the utility. So this is really all part of solving the sustainable energy problem, something that has been a goal from the beginning."

"[The] next phase of the Company and Tesla creates some of the best products in the world," added SolarCity founder and CEO Lyndon Rive. "When you add their manufacturing expertise and the investment they are making into storage, as Elon mentioned, it’s going to be very clear that this company of solar combined with storage will be able to provide energy at a lower cost than traditional forms of energy. And that energy won’t just be energy as we know it today; it will be energy plus grid-related services, where you can address all the grid needs when you add storage to the equation."

Participating in SolarCity's conference call for its second quarter financial results, Musk announced that SolarCity will unveil a solar roof (as opposed to solar modules on a roof). "I think this is really a fundamental part of achieving differentiated product strategy, where you have a beautiful roof," said Musk. "It’s not a thing on the roof. It is the roof."

The solar roof business could be very big. There are 5 million new roofs installed every year in the US, and buying an integrated roof with built-in solar power generation makes more sense than adding solar panels to an aging roof.

Tesla has been criticized for spending a lot of cash on the Gigafactory, and then on the financially troubled SolarCity. But, in my opinion, the critics miss the big picture, which is Tesla's strategy to pivot from a niche to a much bigger market. Tesla, a Silicon Valley company with technology rather than car making in its DNA, is transitioning from electric car maker to supplier of energy solutions to consumers and businesses, including other car makers. Tesla cars could become a high-priced showcase for Tesla’s technologies used by other car makers for cheaper cars, and Tesla could end up making most of its money with innovative and affordable clean energy solutions. In this scenario, Tesla would become the world leader in an important sector, and its stock would skyrocket.

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