While Tesla’s (TSLA) stock is plunging following its earnings due to worries about profitability and the release of new products, Tesla Energy is a growing segment of the company.
Part of Tesla Energy, the company’s energy storage division offers installations ranging from compact Powerwall batteries for residential use to enormous Megapack storage facilities designed to allow utilities and municipalities to store vast amounts of energy for use during periods of peak energy use.
Tesla reported in its Q2 financial report that it had deployed 9.4 GWh (gigawatt hours) of battery energy storage, which is more than twice as much as the firm had deployed in the first quarter and its greatest quarterly amount ever. The unit saw record sales ($3.014 billion) and gross profit ($740 million) as a result of the deployments.
Strong operating leverage was also evident in the expansion of the Energy division, with gross margins rising to 24.6% in Q2 from 18.4% in the previous year. Tesla’s car gross margin decreased in the second quarter to 18.5% from 19.2% in the same period last year.
Actually, the energy division’s $740 million gross profit was 16.3% of Tesla’s overall profit—nearly three times higher than its 6.1% share from the previous year.
The percentage of the company’s total profit that goes to Tesla Energy is increasing. Investors and analysts are taking notice, drawing comparisons with another rapidly expanding division of a major IT company: Amazon Web Services (AWS).
“Yeah, I would [compare it to AWS],” stated Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, in a Yahoo Finance interview. She also mentioned that the company’s decision to increase its Tesla holdings was prompted by the company’s observation of Tesla’s Lathrop plant and the company’s success with Tesla Energy.
“We expect to see the growth really drive earnings in [the] next few years,” she said, citing Tesla Energy’s outstanding growth and profitability as the segment’s lost cost producer. Elsevier Tengler funds own about 11,270 Tesla shares.
Adam Jonas of Morgan Stanley called Tesla’s Q2 energy deployment storage statistic a “show stealer” earlier this month, pointing out that the 9.4 GWh deployed was twice the company’s projection.
Cantor Fitzgerald raised its price objective for Tesla to $245 in response to Q2 results, noting the company’s energy storage business.
“Due to an increase in our energy storage and deployment estimate, we are raising our FY24 [Tesla] revenue projection to $101.2B (from the previous $100.6B). We now expect to convert into energy storage and deployment revenue of ~$9.6B (vs. prior ~$6.6B),” Cantor wrote in a note. “We now predict 29GWh for FY24 (vs. prior 16.3GWh).
Following the results, Stifel maintained its $265 price target and Buy recommendation, citing among other things the fact that Tesla Energy’s revenue and margins “easily beat expectations” and that its growth looked “strong.”
Additionally, Baird analysts pointed out that short-term downturn in car margins will be partially offset by “strength” in the Energy sector and growing regulatory credits that Tesla receives from EV sales. Baird has a $265 price target and an Outperform rating.
Not every analyst thinks Tesla Energy can rescue the company, which is now stuck with declining overall gross margins. According to UBS analysts, the success of Tesla’s energy sector is already factored into the stock price; at current prices, the stock is primarily a gamble on autonomy.
Although analysts don’t think Tesla Energy’s “growing importance” to gross profits is enough to change the “current consensus,” Jefferies has a $165 price target and a Hold rating for the company.
Still, Tesla Energy is becoming a bigger element of the company’s network of businesses, which also includes services, charging, AI, and automobiles. If it can maintain its profitable growth, it may even overtake the most valuable in a few years, similar to Amazon’s AWS, whose revenue increased by 17% year over year in the most recent quarter.