Should You Buy Tesla Motors, Inc. As A Clean Energy Play?

  • Much investor attention is currently focused on Tesla's launch of Model 3, set to be the first mass-produced EV in the world.
  • For Tesla to be able to sell Model 3 at just 35k, it will have to significantly lower battery production costs.
  • Tesla's energy products could soon become a very significant source of ancillary revenue for the company.

With much investor attention currently focused on Tesla's (NASDAQ:TSLA) recent unveiling of Model 3 on March 31, few investors are probably giving much thought to another integral part of Tesla’s manufacturing equation that will make the Model 3 possible - the battery pack. Tesla intends to sell Model 3 at just 35k, or half the price of a Model S. For that to be possible even for the smaller-sized vehicle, Tesla has little choice but to cut battery production costs quite dramatically.

Indeed, when Tesla announced initial plans for Model 3 about two years ago, the company said that it was banking on its giant Gigafactory to help it bring battery production costs down by about 30% from $400/kWh. Some analysts have been skeptical if Tesla can actually succeed in bringing down battery costs by that much. But Tesla’s CEO Elon Musk reaffirmed the company’s commitment to achieving that end during the 39th Automotive News World Congress held in January 2015 by saying that it ‘‘was guaranteed’’ that the gigafacatory would lower battery costs.

But that won’t be the end game for Tesla. The end game as far as battery costs are concerned will be to bring down battery production costs to just $100/kWh by 2020, or about a 75% drop from current costs.

If Tesla is able to accomplish its objective, it might also be well on its way to achieving something else unprecedented- it will have reached a cost low enough to be disruptive to grid power distribution.

TSLA-3

Source: UtilityDive.com

Morgan Stanley projects that there will be 3.9 million Tesla cars on the road by 2028, equivalent to 237 gigawatts of battery capacity. That’s more than 10 times the current grid storage capacity and about 22% of current U.S. electricity generating capacity. This gives Tesla huge potential in vehicle-to-grid and vehicle-to-building spaces.

TSLA-2

Source: UtilityDive.com

But perhaps Tesla investors won’t have to wait that long for the company’s energy storage products to start contributing significantly to the company's top and bottom lines. Tesla has already said that its Powerwall and Powerpack energy storage products are seeing strong demand. Tesla said mid-last year that it had managed to secure 100,000 reservations (non-binding orders) worth $1B for its Powerpacks and Powerwalls. The company said that 80% of orders were placed for Powerpack, the larger battery systems that are geared for commercial customers, industrial customers, and utilities. Tesla said that these orders could drive $400M-$450M per quarter in grid battery sales in 2016, and could rapidly scale to a few billions of dollars by as early as 2017.

If perhaps you are wondering why anybody would care to buy Tesla’s energy storage products with so many other rival products in the market, well there are a few plausible reasons. The first is that the company says its products are ‘‘plug and play’’ meaning a customer can order a Powerpack or Powerwall from Tesla and receive everything else they need for the installation in a single order. The second reason could simply be a lifestyle aspect like an iPhone user wanting to own an Apple Watch. This applies to the Powerwall which is designed to be installed at homes to help with demand response to maximize energy savings and revenue.

Oppenheimer is one of the latest Wall Street analysts who picked Tesla as a good stationary energy storage play saying:

"stationary energy storage is clearly the area which poses the most potential for change to the status quo." The analysts view Tesla as, "a transformative battery-powered product company with leading expertise in cell design, packaging, associated software, human-machine and machine-machine interaction design."

Tesla debuted into the stationary energy storage industry during Q4 2015 and said that it was seeing strong demand with margins already being positive. Although Tesla did not delve into the financial aspects of the business, Elon Musk had earlier told Fortune that the business could achieve gross margins of 15% during its early days with the potential to hit 25%-30% in a few years. In comparison, Tesla’s expects Model S gross margin to hit 30% by the end of 2016.

Investor Takeaway

 As Tesla investors continue focuse on the launch of Model 3, perhaps now is good time to examine the EV manufacturer's potential as a clean energy play. We are already into the first innings of Tesla’s energy business and so far everything seems to be working as per plan. It Tesla’s energy business takes off as anticipated, then it stands a chance of becoming a very significant ancillary revenue stream for the company.

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