Tesla's Booming Energy Storage Business: A Potential Boost for Its Stock?

Israeli Prime Minister Netanyahu and Elon Musk, the CEO of Tesla , recently met at the Tesla facility in Fremont, CA. While Tesla's electric vehicle (EV) business usually grabs the spotlight, its energy business has considerable potential. As the renewable energy sector anticipates a surge in demand fueled by government incentives and climate change concerns, Tesla's energy storage solutions could play a vital role. The Inflation Reduction Act offers significant subsidies and credits for clean energy investments, making it important to examine the performance of Tesla's energy business and its future prospects.

Israeli Prime Minister @netanyahu and Elon Musk toured the Tesla factory and took a drive in the Cybertruck today. pic.twitter.com/DNvHZo5x55

— Tesla Owners Silicon Valley (@teslaownersSV) September 19, 2023

The Performance of Tesla's Energy Business

While Tesla's automotive revenues reached over $71 billion in 2022, the energy business accounted for a modest $3.9 billion. Although the growth rate in the energy sector has been slower compared to EV sales, it still achieved a compounded annual growth rate of approximately 37% over the last three years. Despite this, the company's solar business experienced mixed results, with a decline in deployments attributed to rising interest rates making project financing more expensive.

The Rise of Energy Storage

In contrast, Tesla's energy storage solutions have gained significant traction. As batteries serve as the backbone of EVs, Tesla's expertise in this area positions them as a leader in performance, energy density, and longevity. The company's large-scale battery storage solutions for commercial installations, called "Megapacks," and the smaller "Powerwall" devices for home use, have seen remarkable growth. In Q2, storage deployments surged by 222% compared to the previous year, reaching 3.7 giga-watt hours. Tesla's dedicated Megapack factory in Lathrop, CA, played a crucial role in ramping up production. The company also has plans to expand its production capacity with a new facility in Shanghai.

The Potential for Expansion

As the percentage of renewable energy in electricity generation continues to rise, Tesla has ample opportunity to scale up its presence in the storage market. A study by the Energy Department suggests that solar energy could account for 40% of electricity generation in the U.S. by 2035, a significant increase from less than 5% in 2022. With Tesla's strong reputation and expertise in battery technology, the company is well-positioned to capitalize on this shift.

The Outlook for Tesla Stock

While Tesla remains a major player in the transition to cleaner transportation and energy, there are factors that may limit its near-term stock growth. The current market price of Tesla stock trades at 77x forward consensus earnings, potentially restricting immediate upside. Additionally, projections indicate a decline in earnings for 2023 due to automotive margin pressure caused by price cuts and contracting gross margins.

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