Tesla’s (NASDAQ:TSLA) energy sector is one of the major revenue contributors and has remained an important business segment for the company. Although the energy business may not be as large as other business sectors such as the 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’s solar or energy business serves to complement its automotive sector 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 discuss about the sales ofTesla’s energy business and its respective gross margin. We will look at the solar sector revenue growth and how the gross margin has changed over the years.
On a side note, the gross margin reflects the profitability of the sector. By looking at the gross margin, we can know about the profitability of the energy business.
Finally, we will also look at the percentage of revenue that the sector has contributed to the company’s overall sales.
Before we begin, let’s take a look at Tesla’s business hierarchy to know more about the energy or solar business segment.
As shown in the snapshot above, Tesla’s energy business revenue comes mainly from two major segments:
- 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 business revenue chart as shown in the next chart.
Tesla’s Energy Generation and Storage Revenue
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. After that, energy sales began to tick higher again in 2019, reaching a new high at $436 million by 4Q 2019.
However, the quarterly energy revenue took a hit in Q1 2020 when sales were down significantly to only $293 million, representing a year on year decline of as much as 10%.
The quarterly revenue in the chart above may not paint a true picture that reflects the growth of the solar business. As such, I have created another revenue chart in the next discussion that shows the revenue trend on a trailing twelve months (TTM) basis.
Tesla’s Energy Generation and Storage Revenue (TTM)
The chart above shows Tesla’s energy or solar revenue from 2017 to 2020 on a TTM basis.
As the chart shows, the TTM 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 Q1 2020, Tesla’s energy or solar sales grew slightly higher to $1.5 billion on a TTM basis compared to the corresponding quarter a year ago.
Overall, Telsa’s energy business revenue has remained stagnant between 2018 and 2020.
Tesla’s Energy Revenue Gross Margin
The chart above represents Tesla’s energy segment gross margin over the past 3 years from 2017 to 2020. As mentioned, the gross margin is a variable that measures the 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.
Looking at the solar business gross margin, the figures have 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 values at almost 30% in 2017 but the numbers dropped drastically to only single-digit values in 2018 before recovering to 20% in 2019.
Again, the energy revenue gross margin declined to less than 5% in 1Q 2020, indicating that the costs of production in the energy sector varied significantly from quarter to quarter.
Similarly, the current chart may not reflect a true picture of the gross margin for the solar revenue. Thus, I have created a TTM chart in the next discussion to smoothes out the curve considerably.
Tesla’s Energy Revenue Gross Margin (TTM)
The chart above shows Tesla’s energy revenue gross margin on a TTM basis.
The current chart looks much better compared to the previous one without all the zig-zagging.
As the current chart shows, Tesla’s energy revenue gross margin has declined significantly since 2017 from about 25% to slightly more than 10% as of 1Q 2020.
The energy sector revenue has stayed at this level of gross margin for quite some time already since 2018, indicating that the energy segment is a low profitability business.
Ratio of Tesla’s Energy Revenue to Total Revenue
Tesla solar business has contributed to an average of 8% of total revenue as shown in the chart above. This figure has dropped considerably in recent quarters and reached as low as 5% as of Q1 2020.
The decline of the ratio may have been caused by Tesla’s focus on the automotive sector, specifically, the Model 3 ramp-up in 2018, which had significantly increased automotive revenue.
At less than 5% of total revenue in the latest quarter, the energy sector does not make much of an impact on the company revenue growth. Nevertheless, the energy business still remains an integral part of Tesla’s business portfolio as both energy storage and electric vehicles are inter-related.
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 business on a TTM basis.
Based on an absolute value comparison, the automotive segment was roughly 15X bigger than that of energy segment as of 1Q 2020 from a TTM standpoint.
Furthermore, the automotive revenue has exploded exponentially after the launch of Model 3 in 2017 whereas the energy revenue has remained flat at around $1.5 billion between 2018 and 2020.
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, the quarterly solar revenue growth has registered both positive and negative numbers, 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 Year Over Year Growth
On a year over year (YoY) basis, the chart shows that most revenue growth occurred in the early stage of the energy business. Solar 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.
In conclusion, Tesla’s energy segment is a low profitability business as seen from the ~10% gross margin from 2018 to 2020. Moreover, revenue growth has been stagnant and stood roughly at $1.5 billion from 2019 to 2020 on a TTM basis.
References and Credits
1. All financial figures in this article were obtained and referenced from Tesla Update Letters and Presentations.
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