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Which One Makes More Money? Tesla Energy Or Automotive

A Tesla battery from an electric car. Flickr Image.

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

Although the energy business makes up only a tiny 6% of total sales as of the latest quarter of Q3 2019, the energy business actually helps to complement the automotive business. For example, Tesla existing Supercharger network could one day be powered by the energy generation and storage system developed at the energy sector. Moreover, Tesla also cross sells its energy products to existing automotive customers. Instead of charging their electric vehicles with fossil fuel, the solar energy system enables their vehicle to be powered by renewable energy.

Tesla acquired SolarCity back in 2016 and since then, the energy generation and storage has become one of the company reportable business segments in its financial statement as shown in the snapshot below.

tesla income statement

Tesla Q3 2019 quarterly filing

In this article, we will look at the comparison of sales and gross margin between the automotive and energy sector of the company. From the gross margin, we can find out which business segment is more profitable. The gross margin is an important variable that measures gross profit before subsequent operating expenses such as sales, general and administrative costs as well as r&d expenses are accounted for.

Of course the higher the gross margin, the higher the gross profit the business will generate. Let’s read on to find out!

Tesla Automotive Revenue

Tesla automotive segment revenue

Tesla automotive segment revenue

The graph above shows Tesla quarterly automotive revenue for the past 5 years from 2015 to 2019.

As seen from the graph, revenue growth in the automotive business has been sort of exponential, growing from just $1 billion of sales in Q4 2015 to more than $5 billion in the latest quarter of Q3 2019.

Prior to Q3 2019, quarterly revenue of more than $6 billion was recorded in two consecutive quarters which were in Q3 and Q4 2018. This was when the Model 3, Tesla mass produced electric vehicle, was at record delivery.

Although revenue has been slightly down since 2019, it’s still on an upward trend. Over the 15-quarter period shown in the chart, the quarterly average growth rate for automotive revenue is roughly 15%.

Tesla Energy Revenue

Tesla energy segment revenue

Tesla energy segment revenue

The graph above shows Tesla quarterly energy generation and storage revenue for the past 5 years from 2015 to 2019.

You may notice that the energy segment revenue has jumped significantly in Q4 2016 to about $150 million from the prior quarter. The reason is that Tesla has started reporting the energy segment revenue in Q4 2016 when the acquisition of SolarCity was completed in the same quarter.

As seen from the chart, Tesla energy business revenue has grown significantly during 2017 and reached more than $400 million in sales in Q1 2018. Since then, energy revenue has sort of fluctuated between the $300 and $400 million range.

Compared to automotive revenue, Tesla energy business revenue is less than 1/10th of automotive revenue in the latest quarter of Q3 2019.

In terms of quarterly average growth rate, the energy sector revenue recorded an average growth rate of about 13% which is slightly lower compared to the figure of automotive revenue.

Gross Margin Comparison: Energy vs Automotive

tesla gross margin

Tesla gross margin: energy vs automotive

In terms of profitability, I have created the chart above that shows the gross margin of both energy and automotive business over a 5-year period.

The gross margin determines gross profitability before other expenses such as r&d and SGA expenses are taken into account. From the gross margin, you can find out the pricing power of the products. For example, a higher gross margin basically means a higher markup the company put on the product. Of course this also means higher gross profit.

Coming back to the chart, you can see that Tesla automotive gross margin is relatively stable without huge fluctuation. Since 2015, automotive gross margin has been roughly between the 20% and 25% range. A 20% gross margin translates to 20% markup on the product. For example, if a vehicle cost the company $20k to manufacture, at 20% gross margin, the company is pricing the vehicle at $24k.

My thought is that the 20% to 25% gross margin is 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 able to make a profit all these years.

When we look at the energy sector, its respective gross margin is worse than that of automotive products. It’s very clear from the chart that the gross margin plot has fluctuated remarkably over the shown period. The dramatic fluctuation of the plot means only one thing — the manufacturing process of energy products has not been streamlined or stabilized yet. This has resulted in the dramatic cost fluctuation of the products.

This is actually expected as Tesla energy products has not reached a critical stage where mass production and adoption is feasible. Unlike automotive products, I believe most energy products is still under the prototyping or development stage. You may argue that Tesla has already churned out working products on the market, but those energy products requires very specific customization and installation steps which are not really meant for the mass market.

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, automotive segment makes more money than energy segment due to the higher gross margin. Since most automotive products has already been through the strict manufacturing steps, Tesla has been able to keep cost down and under controlled. The success story is that Tesla has mass-produced and delivered its flagship electric vehicle, Model 3, to the mass market, with a price tag that could afford the company a profit.

Percentage of Segment Revenue to Total Revenue

tesla ratio to total revenue

Tesla energy and automotive revenue to total revenue ratio

The graph above shows the ratio of energy and automotive sector revenue to total revenue for the past 5 years from 2015 to 2019.

As seen from the chart, automotive revenue makes up over 80% of total revenue whereas energy business takes up only less than 10% over the 5-year period.

Although the energy business contributes less than 10% of revenue to Tesla, the segment will remain an important part of the company. As mentioned at the beginning of the article, the energy sector is helping the automotive sector in terms of cross selling and support. Tesla is promoting its energy products to automotive customers for a true renewable energy experience.

Moreover, I believe someday all Tesla Supercharger network will be powered by its own energy generation and storage system which gets most of its energy from the sun.

Conclusion

To recap, Tesla automotive sector has grown tremendously over the past 5 years whereas the growth of its energy sector has been relatively flat especially in 2018 and 2019.

Automotive segment gross margin is much higher and stable compared to that of energy segment. We are seeing wild fluctuation in gross margin in the energy segment, indicating that the cost of manufacturing the products has not been streamlined or stabilized yet.

Tesla automotive gross margin of 20% to 25% might still be considered low, causing the automaker to incur losses over the years. I believe the gross margin in the coming years could go higher, judging from its improving manufacturing process and the mass adoption of electric vehicles in the future.

All in all, the current situation of Tesla represents a curse and also an opportunity for investors. If Tesla could somehow improve its automotive gross margin and introduce mass adoption to its energy products, the stock price will be rocketing to the moon.

Of course, I see this as a possible scenario, judging from the success of Model 3 and the future launch of Model Y. Besides, there are 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 automotive sector.

References:

1. All financial figures in this page were obtained from Tesla Investor Relation: Tesla Quarterly Results.

2. Images were obtained from Niall Kennedy and National Renewable Energy Lab.

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