The energy sector has been one of Tesla (NASDAQ:TSLA) major revenue contributors and has remained an important business segment for the company since the acquisition of SolarCity in 2016.
Although the energy business may not be as large as other business sectors such as the automotive, it’s playing a very important role in the company’s ultimate goal of transitioning the world from fossil fuels to clean and renewable energy.
Aside from serving as an independent business, the solar or energy business also serves to complement Tesla’s automotive business by cross-selling energy generation and storage products to its automotive customers.
By doing that, Tesla’s automotive customers get to enjoy a truly renewable energy experience when they charge their electric vehicles with a Tesla solar-powered charging station which can easily be installed at the owners’ home.
In this article, we will look at the sales of Tesla’s energy business and its respective gross margin to find out how profitable the energy business is.
Moreover, we will also look at the energy sector revenue growth rates and how the gross margin or profitability has changed over the years.
On a side note, the gross margin reflects the gross profitability of the sector. By looking at the gross margin, we can find out the profitability of the energy business.
Finally, we will look at the percentage of revenue that the energy sector has contributed to the company’s overall sales.
Tesla’s Energy Business
Before we begin, let’s take a look at Tesla’s business hierarchy that shows where the energy or solar business segment is located.
As shown in the snapshot above, Tesla’s energy is one of the main business segments that stands at the same hierarchy with other segments such as the automotive.
Tesla’s energy sector gets its sales from two major sources:
- 1. Energy generation and storage sales
- 2. Energy generation and storage leasing
The 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 systems where customers purchase electricity from Tesla under the power purchase agreement.
Let’s move on to look at the company’s energy revenue or sales numbers.
Tesla’s Energy Generation and Storage Revenue (Quarterly)
The chart above shows Tesla’s total solar revenue which is also referred to as the energy generation and storage revenue over the past 3 years from 2017 to 2020.
You may notice that the chart started in 4Q 2016. The reason is that Tesla completed the acquisition of SolarCity in 3Q16 and consolidated the financial results from SolarCity starting in 4Q16.
Prior to SolarCity acquisition, sales revenue from the energy business was insignificant.
As the chart shows, Tesla’s solar or energy revenue has grown significantly since 4Q 2016 but had remained flat throughout 2018.
Tesla’s energy sales began to grow modestly in 2019 and reached a new high at $436 million by the end of 2019.
However, the quarterly energy revenue dived significantly to only $293 million in 1Q 2020, representing a year on year decline of as much as 10%.
By 4Q 2020, Tesla’s energy revenue recovered and reached a record high of $752 million, driven mainly by a record energy storage deployments which hit as much as 1,584MWh in the same quarter.
Tesla’s Energy Generation and Storage Revenue (TTM)
From a trailing 12-months (TTM) basis, Tesla’s energy revenue grew significantly in the early stage of the business.
However, the TTM revenue remained flat in 2018 and has slightly declined in 2019.
As of Q4 2020, Tesla’s energy or solar sales increased significantly higher to nearly $2 billion on a TTM basis, representing a year on year growth of 30%.
According to Tesla, the record energy sales in 4Q 2020 were primarily driven by strong demand for its Powerwall and Megapack energy storage products which had more than doubled in the same quarter.
Aside from storage deployment, Tesla’s solar energy system has also increased by 59% to 86MW year over year in 2020 Q4.
While Telsa’s energy business has remained stagnant throughout 2019, it was a different story in 2020, with 3Q and 4Q 2020 being the most productive quarters when sales reached a record high in both quarters.
Tesla’s Energy Gross Margin (Quarterly)
As mentioned, the gross margin is a metric that measures the gross profitability of a product.
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.
On a quarterly basis, Tesla’s energy gross margin has been on a roller-coaster ride in the last 3 years, bouncing dramatically between -5% and 30%.
The quarterly gross margin was at the highest at almost 30% in 2017 but that has dropped drastically to only single-digit values in 2018 before recovering to 20% in 2019.
Again, the energy sales gross margin continued to slide throughout 2020 and reached as low as -5% in 4Q 2020, indicating that the costs of production in the energy sector had increased significantly.
From a comparison perspective, Tesla’s automotive sector, including the automotive sales and automotive leasing generates a gross margin between 20% and 40% respectively, indicating that the energy segment is less profitable compared to the automotive products.
At a -5% gross margin, Tesla is making a loss in the energy business.
Tesla’s Energy Gross Margin (TTM)
The TTM chart looks much better compared to the previous one without all the zig-zagging.
From a TTM perspective, Tesla’s energy gross margin has been on a decline since 2017 from about 25% reported in 2017 3Q to nearly 0% as of 2020 4Q.
The decline in gross margin for the energy segment was the steepest throughout 2020.
The declining gross margin can be due to a couple of factors.
The major one can be attributed to a lower sales volume.
In Tesla’s case, its energy segment is still relatively small and has yet to achieve the scale required to reach profitability.
For this reason, Tesla has yet to reach the economies of scale in the energy segment which is necessary to keep the costs of production low.
While Tesla’s energy may have hit the $2 billion sales from a TTM standpoint, its profitability has declined and reached nearly 0% gross margin in Q4 2020, suggesting that the solar sector makes little to no profit.
Ratio of Tesla’s Energy Revenue to Total Revenue
Tesla solar business has contributed around 10% of total revenue as shown in the chart above prior to 2019 on a TTM basis.
This figure dropped considerably in recent quarters and reached as low as 6% as of Q4 2020.
The decline of the ratio may have been caused by Tesla’s relentless focus on the automotive sector, specifically, the Model 3 and Model Y ramp-up in recent years which have significantly bumped up the revenue.
At only 6% of total revenue in the latest quarter, the energy sector does not seem to be a major growth driver for revenue at this moment.
Nevertheless, the energy business will remain an integral part of Tesla’s strategy in transitioning the world to using renewable energy.
Tesla’s Energy vs Automotive Revenue
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 segment on a TTM basis.
Based on an absolute value comparison, the automotive segment is roughly 10X to 15X bigger in terms of sales figures from a TTM standpoint.
For example, in 2020 Q4, Tesla’s automotive revenue was as much as $27 billion while the energy revenue was only $2 billion on a TTM basis during the same quarter.
At these figures, Tesla’s automotive business is about 14X larger than the energy business in terms of absolute revenue.
As such, there is still a lot of rooms for the energy business to grow.
Tesla believes that the energy business may ultimately grow to be as huge as or even bigger than the automotive business someday in the future.
Tesla’s Energy Revenue Sequential Growth
The chart above shows Tesla’s quarterly (QoQ) growth rate of the energy revenue for the previous 3 years from 2017 to 2020.
In the last 3 years, Tesla’s quarterly solar revenue has grown both positively and negatively, with positive numbers slightly more than the negative numbers.
Sequential growth was the worst in 2018 when 2 out of 4 quarters were seen having negative growth rates.
However, energy business revenue improved tremendously at the start of 2019 when 3 out of 4 quarters reported positive growth rates. Throughout 2019, we are seeing near double-digit growth rates.
Solar revenue declined the most in Q1 2020 at nearly 33% on a quarterly basis, marking the end of a streak of revenue growth seen in 2019.
Tesla’s energy revenue grew again at the start of 2020, reaching as much as 56.5% and 30% quarterly growth rates in 3Q and 4Q 2020, respectively.
Tesla’s Energy Revenue Year Over Year Growth
On a year over year (YoY) basis, the chart shows that most energy revenue growth occurred in the early stage of the energy business.
Solar or energy revenue grew in the high double-digit between 2017 and 2018.
However, YoY energy revenue growth came to a stop in 2019 when most quarterly results reported negative YoY growth rates.
The company reported a YoY growth rate of -10% in Q1 2020 for the energy segment, indicating that the solar business has declined considerably in 2020.
While YoY growth rates were negative at the start of 2020, Tesla managed to turn to a positive growth rate by 2020 3Q and 4Q at 44% and 72.5%, respectively.
In short, Tesla’s energy segment is a low profitability business as seen from the declining gross margin from 2018 to 2020 to near 0% as of 2020 Q4 on a TTM basis.
The declining margin has to do with the low sales volumes of the energy sector, thereby causing costs of revenue to be on the high side.
Moreover, Tesla’s solar or energy revenue growth has been stagnant from 2019 to 2020 on a TTM basis.
However, we may be seeing light at the end of the tunnel in 2020 when Tesla managed to grow its energy sales to as much as $2 billion on a TTM basis by 4Q 2020, the highest number since the inception of the energy business.
The growth has been mainly driven by strong demand for Tesla’s storage products including Megapack and Powerwall.
Additionally, we are also seeing strong solar deployments in the same quarter to more than 86MW, representing a growth of 51% compared to the prior quarter.
References and Credits
1. All financial figures in this article were obtained and referenced from Tesla Update Letters and Presentations.
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