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Does Tesla Solar Revenue Compare Favorably With Car Sales?

A Tesla battery from an electric car. Flickr Image.

While Tesla’s revenue comes mainly from its automotive segment, its energy business still makes serious money. According to Elon Musk during an earnings call, the solar segment could eventually grow to be the same size or even bigger than its automotive business.

Although the energy business made up only a tiny 5% of total sales as of the latest quarter of Q1 2020, it helped to complement the automotive business. For example, Tesla’s existing Supercharger network could one day be powered by the energy generation and storage system developed in the energy sector.

Moreover, Tesla also cross-sells its solar products to existing automotive customers. Tesla has asked to install its solar energy generation system in their homes. The unique selling point here is that Tesla’s existing automotive customers could charge their electric vehicles with solar energy instead of with fossil-fuel generated power.

Tesla acquired SolarCity back in 2016. Since then, the energy generation and storage has become a reportable business segment in its financial statements. The following snapshot gives an example of where the energy and automotive business segments are located in the company’s business hierarchy and how each segment gets its sales.

Tesla solar vs automotive sector

Tesla solar vs automotive sector

In this article, we will examine and compare Tesla’s automotive and solar sales and gross margin over several quarters to find out the respective trends. In this aspect, we want to know if the long-term trends of sales and the gross margin are trending higher or lower.

The gross margin is an important metric that measures profitability. From the gross margin, we can find out which business segment is more profitable than the other.

Let’s move on to find out more!

Tesla’s Automotive Revenue

Tesla automotive revenue

Tesla automotive revenue

Let’s start with Tesla’s automotive sector. The graph above shows Tesla’s quarterly automotive revenue for the past 5 years from 2015 to 2020.

As seen from the graph, automotive revenue growth has been nothing short of exponential, growing from just $1 billion of sales in Q4 2015 to more than $5 billion in the latest quarter of 1Q 2020.

The 1Q 2020 quarterly result represents a year over year increase of nearly 40% for the automotive sector.

Before 2020, Tesla’s quarterly record revenue of more than $6 billion was reported in 2018 and 2019. This was when the Model 3, Tesla’s mass-produced electric vehicle, was at record delivery.

Although revenue has been slightly down since 2019, it’s still on an upward trend throughout 2019. Over the 18 quarters shown in the chart, the average year over year growth rate for the automotive segment was close to 60%, illustrating that Tesla’s automotive products have been in huge demand all this while.

Particularly, Tesla’s quarterly automotive revenue had experienced a huge upside between 2018 and 2020. The surge in revenue during these periods was not a coincidence but was mainly driven by the huge demand for the company’s flagship product, the Model 3, which was launched since 2018.

Tesla’s Solar Revenue

Tesla solar revenue

Tesla solar revenue

Next, we will explore Tesla’s energy segment revenue. The graph above shows Tesla’s quarterly energy generation and storage revenue for the past 5 years from 2015 to 2020.

Over the graph, you may notice that the solar sector revenue surged significantly in Q4 2016 to $131 million from the prior quarter of only $23 million. The reason for the huge upside was a result of the completion of SolarCity acquisition in that particular quarter.

After SolarCity acquisition, Tesla’s energy revenue experienced significant growth since 2017 and reached more than $400 million in sales in some quarterly results during 2018. However, the energy sector revenue has remained flat at an average figure of $350 million between 2018 and 2020. In this aspect, the energy business had not grown as much as the automotive business during these periods.

Compared with the automotive revenue, Tesla’s solar business revenue was less than 1/10th of the automotive revenue in the latest quarter of Q1 2020, illustrating just how far the energy sector has lagged behind the automotive sector.

In terms of average year over year revenue growth, the energy sector recorded an average growth rate of about 29% which was less than half of the growth rate of the automotive sector. The average growth rate was measured beginning 4Q 2016 in which Tesla completed the SolarCity acquisition and the respective financial results were consolidated.

As of 1Q 2020, Tesla’s solar revenue of $293 million represents a year over year decrease of as much as 10%. The result is in huge contrast with the automotive revenue which grew 40% year over year in the same quarter.

Gross Margin Comparison: Energy vs Automotive

Tesla gross margin: automotive vs solar

Tesla gross margin: automotive vs solar

In terms of profitability analysis and comparison, I have created the chart above that shows the gross margin of both energy and automotive business over 5 years from 2015 to 2020.

The gross margin determines the gross profitability before other expenses such as R&D and SG&A are included. From the gross margin, we can find out the pricing power of the products. For example, a higher gross margin means a higher markup that the company can put on the products. Of course, this also means a higher gross profit.

When we examine the current chart, we can see that Tesla’s automotive gross margin has been relatively consistent without dramatic fluctuation throughout the 5 years. The stable trend of the automotive gross margin is vastly different from the huge fluctuation of the solar business gross margin.

Since 2015, the automotive gross margin has been roughly between the 20% and 25% range, representing a 20%+ markup on the automotive products. For example, if the cost of sales for a vehicle was $20k, at 20% gross margin, the company can price the vehicle at $25k.

My thought is that the 20%+ gross margin seems a bit low for an automaker like Tesla. The reason is that automaker like Tesla usually has huge overhead to deal with. That may explain why Tesla has not been profitable all these years at the 20%+ gross margin.

Nevertheless, the relatively stable gross margin of the automotive sector generally indicates that Tesla already has the needed sales volume to keep the production costs under control and thus, the stable gross margin.

When we look at the energy sector, its own gross margin has been relatively worse than that of automotive products between 2016 and 2020.

Moreover, the energy gross margin has been fluctuating like crazy over the shown period. The figure has gone from as low as 5% to as high as 30% in some of the quarterly results. The dramatic swing of the energy gross margin means only one thing that it still does not have the needed sales volume to keep the cost of production stable. This has resulted in the dramatic cost fluctuation of the products.

The result is sort of expected as Tesla’s solar products still have not reached the critical stage where mass production and adoption is feasible. Unlike automotive products, I believe that most energy products, especially the large scale energy generation systems do require precise customization and installation steps, which are not meant for mass-market adoption. The customization and maintenance that require highly skilled engineering personnel may have resulted in the higher costs of sales and thus, the low gross margin in some of the quarterly results in the solar segment.

For example, Tesla Solar Roof is a product in which the company unveiled back in 2016, and Tesla has yet to master the production and installation for the mass market. According to Green Tech Media, Tesla Solar Roof is both too costly to install and requires skillful contractors to execute at the level of a professional roofer, preventing leaks and ensuring decades of durability.

All in all, Tesla’s automotive segment has better gross profitability than the energy segment due to the higher gross margin.

Ratio of Segment Revenue to Total Revenue

Ratio of Tesla solar and automotive to total revenue

Ratio of Tesla solar and automotive to total revenue

The graph above shows the ratio of energy and automotive sector revenue to total revenue for the past 5 years from 2015 to 2020.

As seen from the chart, Tesla’s automotive revenue made up over 80% of total revenue, whereas the energy business took up less than 10% of revenue over the 5 years. The ratio has been relatively unchanged over the 5 years, indicating that the automotive business has remained as the most critical revenue generator for the company all this while.

Although the energy business contributes less than 10% of revenue to Tesla, the segment will remain an essential part of the company. As mentioned at the beginning of the article, the energy sector helps to complement the automotive sector in cross-selling and support. Tesla has asked its automotive customers to install the solar energy generation system at their homes to experience a genuinely renewable energy environment.

Moreover, I believe someday all Tesla’s Supercharger network will most likely be powered by its solar generation and storage systems, which gets most of its energy from the sun for free.

Conclusion

To recap, Tesla’s automotive sector has grown tremendously over the past 5 years, whereas the growth of its solar sector has been relatively flat, especially between 2018 and 2020.

The automotive segment’s gross margin has been much higher and stable than that of the energy segment for the past 5 years. We see wild fluctuation in gross margin in the energy business, indicating that the production costs may not have been streamlined or stabilized yet due to the lower sales volume in the energy sector.

Tesla’s automotive gross margin of 20% is still relatively low, considering that the automaker has been incurring losses over the years. I believe the gross margin in the coming years could go higher, judging from the improving manufacturing process and the introduction of more electric vehicles in the future.

For Tesla, the current situation may represent an opportunity for investors. If Tesla could somehow further improve its automotive gross margin and introduce the mass adoption to its energy products, the stock price will be rocketing to the moon in no time.

Of course, I see this as a possible scenario, judging from the success of Model 3 and the future launch of more automotive products such as the Model Y. Besides, there is vast opportunity ahead for the energy segment. As pointed out by Elon Musk, the energy sector could one day become the same size or even bigger than that of the automotive sector.

References:

1. All financial figures such as revenue and gross margin on this webpage were obtained and referenced from Tesla Investor Relation: Tesla Quarterly Results.

2. Images were used under Creative Common Licenses and obtained from Niall Kennedy and National Renewable Energy Lab.

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