Tesla’s Energy Business Grew 2x In Q2. What’s Next?

Tesla (NASDAQ:TSLA) published a mixed set of Q2 2024 results on July 23, with automotive revenue declining by close to 7% year-over-year and earnings declining by 42%.  Several factors have been dampening demand for Tesla vehicles including high interest rates and mounting competition in markets such as China. However, Tesla’s energy business proved to be a bright spot for the company, with sales doubling compared to last year to about $3 billion. So what’s driving the growth for the business, which has long been a mixed performer for Tesla?

Tesla’s Energy business sells energy storage products and also sells and installs solar energy systems to end customers. Over the last quarter, Tesla said that it saw a record 9.4 gigawatt-hour (GWh) of deployments of storage solutions led by strong demand for the Megapack and Powerwall storage solutions.  Megapack is a large-scale battery storage system targeted at utility companies, while Powerwall is a home energy storage solution. Tesla has been ramping up production of its storage solutions at its battery manufacturing facility in Lathrop, California. The energy business is also growing more profitable. Over the last quarter, gross margins stood at 24.5%, up over 600 basis points compared to last year. This is also ahead of the automotive business which posted 18.5% gross margins during Q2.

Demand for energy storage solutions is likely to expand with growing installations of renewable energy sources, such as wind and solar, which see their power production vary with weather conditions and the time of day. Tesla’s storage solutions could reduce the intermittency by storing excess energy generated during lower consumption periods while discharging when demand outstrips production. With these battery packs, renewable power plants could be run at a steady state. Tesla is also looking to beef up its manufacturing capacity with a new plant in Shanghai, which is due to come online early next year, expected to potentially triple the company’s output of storage solutions.

That said, we don’t expect the business to move the needle for Tesla in the long run, given the sheer size of Tesla’s automotive business and also due to the upside Tesla could see from areas such as autonomy and self-driving software. Energy sales accounted for just about 12% of Tesla’s total revenues over the last quarter. Moreover, Tesla has indicated that its deployments could be lumpy, given that timing depends upon several factors including project milestones for large-scale installations. The market for storage solutions and solar is also extremely competitive and Chinese players – who typically enjoy a cost advantage – have a strong presence in this space. Unlike the automotive business, the energy business is likely to be more commoditized. This could limit the margins that Tesla earns from the segment in the long run.

TSLA stock has seen little change, moving slightly from levels of $235 in early January 2021 to around $245 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. Overall, the performance of TSLA stock with respect to the index has been quite volatile. Returns for the stock were 50% in 2021, -65% in 2022, and 102% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TSLA underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Discretionary sector including AMZN, HD, and TM, and even for the mega-cap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TSLA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

[1] Returns as of 7/24/2024
[2] Cumulative total returns since the end of 2016

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