Tesla (NASDAQ:TSLA) energy sector is one of the major revenue contributors to the company. Although the energy business may not be as large as other business sector such as automotive, it’s still playing a very important role in the company’s ultimate goal of replacing fossil fuels with clean and renewable energy.
Moreover, Tesla energy business serves as a complement to its automotive segment whereby the company is cross-selling energy generation and storage products to its automotive customers for a full renewable energy experience. In this case, Tesla is promoting the concept of charging Tesla electric vehicles with its proprietary solar powered charging station which can easily be installed at the owners’ home.
In this article, we will discuss exclusively about Tesla energy business revenue and its respective gross margin.
Before we begin, let’s take a look at Tesla business hierarchy to know more about its business segments.
As the above snapshot shows, Tesla energy business revenue comes mainly from two major segments:
- 1. Energy generation and storage sales
- 2. Energy generation and storage leasing
Basically, energy generation and storage sales revenues come from the sales of solar energy systems and energy storage to residential, small commercial and large commercial and utility grade customers.
On the other hand, energy generation and storage leasing revenues come from the leasing of solar energy systems where Tesla is the lessor. Besides, leasing revenues also come from solar energy system where customers purchase electricity from Tesla under power purchase agreement.
Tesla Energy Generation and Storage Revenue
The chart above shows Tesla total energy business revenue which is also referred to as energy generation and storage revenue over a 3 years period from 2017 to 2019.
You may notice that the chart started on 4Q 2016. The reason is that Tesla completed the acquisition of SolarCity in 3Q16 and consolidated the financial results from SolarCity starting 4Q16. Prior to SolarCity acquisition, sales revenue from energy business had been insignificant.
As the chart shows, Tesla energy revenue has grown significantly since 4Q 2016 but had remained flat in 2018. After that, energy sales revenue started to take off in 2019, growing close to double digit figures in most quarters in 2019.
In 4Q 2019, quarterly energy business revenue hit record high at $436 million, achieving a year on year growth rate of as much as 18% compared to prior year.
Overall, the growth of Tesla energy business revenue from just $131 million in 4Q16 to $436 million in 4Q 2019 represents a 400% growth over the 3-year period.
The long-term trend of the chart shows that the energy segment revenue has been trending higher over the 3-year period, indicating that the company energy business is slowly improving and may gain a larger market share in future.
Tesla Energy Revenue Gross Margin
The chart above represents Tesla energy revenue gross margin over a 3 years period from 2017 to 2019. The gross margin is a variable that measures the competitiveness of a product that a company is selling.
A high gross margin usually indicates that the specific products can command a higher sale price relative to its competitors. This competitiveness can come from a strong brand or a moat that the company has over its competitors.
Looking at Tesla energy business gross margin, the figures have been on a roller-coaster ride over the 3-year period. Back in 2017, quarterly gross margin was at the highest values at almost 30% but the figures dropped significantly to single digit values in 2018 before recovering to 20% in 2019.
As of 4Q 2019, Tesla energy revenue gross margin has declined significantly from prior quarter to slightly more than 10% even though revenue was at record high in the same quarter.
In short, Tesla energy business is a low gross margin business where the cost of revenue can change dramatically, indicating that Tesla does not have a moat in this business segment.
Ratio of Tesla Energy Revenue to Total Revenue
Tesla energy business has contributed in average of 8% of revenue to total revenue and hit the highest figure at 12% in 1Q18. After that the contribution of revenue from energy business to total revenue has declined and tapered down to 6% throughout 2019.
As of 4Q 2019, Tesla energy segment contributed only 6% of revenue to the company total revenue. This figure is the lowest among all the periods shown in the chart above.
The energy business contribution to revenue has been trending lower at the start of 2018 to less than 10% of total revenue. The drop in the ratio may have been caused by Tesla focus on Model 3 ramp up in 2018, which had increased automotive revenue significantly compared to energy product revenue.
At less than 10% of total revenue, the energy sector may not make much of an impact to the company revenue growth. Nevertheless, the energy business remains an integral part of Tesla’s business portfolio as both energy storage and electric vehicles are inter-related. This can be seen from the exclusive use of internally developed battery in all Tesla electric vehicles.
Furthermore, the energy storage technology developed in Tesla is also applied in all the company storage products such as Powerwall and Powerpack. Tesla has also been promoting energy generation and storage products to its own electric vehicles customers. In short, Tesla has developed synergy in both automotive and energy businesses.
Tesla Energy and Automotive Revenue Comparison
To get an idea of how far the energy business revenue has progressed with respect to automotive revenue, the chart above shows the revenue comparison between the energy and automotive business.
On a dollar to dollar basis comparison, the automotive segment is roughly 15X bigger than that of energy segment as of 4Q 2019.
Furthermore, automotive revenue has grown exponentially after the launch of Model 3 whereas energy revenue has been flat throughout 2018 and 2019.
Chart of Tesla Energy Revenue Sequential Growth
The chart above shows the quarterly (qoq) growth rate of Tesla energy revenue for the previous 3 years from 2017 to 2019.
Over the 3-year period, quarterly growth rates have registered both positive and negative numbers, with positive numbers slightly more than negative numbers. Sequential growth has been the worst during 2018 when 2 quarters are having negative growth rates.
However, energy business revenue improved tremendously at the start of 2019 when 3 out of 4 quarters in 2019 are having positive figures. In 2019, we are seeing near double-digit growth rates based on the chart above.
From a spreadsheet calculation done separately, the average quarterly growth rate for all the quarters in the chart is around 12%. The double digit average growth rate shows that Tesla energy business is pretty much relevant and still growing impressively, despite labor cost overruns and other difficulties encountered in the energy segment.
Chart of Tesla Energy Revenue Year Over Year Growth
The chart above shows the year on year(yoy) growth of Tesla energy business revenue.
Year over year growth has been spectacular over the 3-year period shown in the chart, with only 2 quarters showing negative growth rates.
The result is particularly impressive in 4Q 2019 when year on year growth rate is 18%. Even though year on year revenue growth has improved tremendously in 2019, the growth rates are still far lagging behind the numbers seen in 2018 when more than 20% of growth are seen during 2018. Nevertheless, it’s a good start for Tesla in 2019 for its energy business.
From a spreadsheet calculation done separately, the average year on year growth rate for the all quarters in the chart is around 33%.
In summary, we are seeing improvement in Tesla energy segment in the second half of 2019 when year on year growth turned positive. If the improvement in energy revenue continues into 2020, we may be seeing an explosive growth in the company energy business which is in line with the outlook stated by the company when it mentioned that both solar and storage deployments should grow at least 50% in 2020 in its Q4 2019 update letter.
Tesla energy business revenue comes from two major segments, namely: (a) energy generation and storage sales and (b) energy generation and storage leasing.
Tesla energy revenue has been trending upward since the acquisition of SolarCity but has fluctuated between the $300 million and $400 million range in 2018 and 2019. As of 4Q 2019, energy revenue has hit record high at $436 million but gross margin suffered and dropped to slightly more than 10%.
Average gross margin for the energy generation and storage revenue over the past 3 years averages around 15% but has trended downward to slightly more than 10% in 4Q19. This shows that Tesla energy segment is a low gross margin business compared to the company other business segments such as automotive sales and automotive leasing.
The contribution from the energy business to total revenue is less than 6% of total revenue in the latest quarter of 4Q 2019. This shows how insignificant the energy sector is to Tesla in terms of revenue contribution. As such, the revenue impact from energy business should be minimal.
Tesla has managed to achieve an average double digit growth rate of 12% and 33% respectively for both sequential and year on year growth. As of 4Q 2019, year on year growth rate for energy revenue is 18% compared to the prior year.
References and Credits
1. All information in this article was obtained from Tesla Update Letters and Presentations.
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