Why Tesla’s high-growth Energy unit could be another Amazon Web Services
As Tesla (TSLA) stock slumps post earnings on concern over profitability and new product reveals, one part of the business is surging: Tesla Energy.
Tesla’s energy storage business, part of Tesla Energy, includes installations as small as Powerwall batteries for the home to massive Megapack storage facilities meant for utilities and municipalities to store large amounts of energy for deployment at peak energy usage times.
In its Q2 financial report, Tesla said that it deployed 9.4 GWh (gigawatt hours) of battery energy storage, its highest quarterly amount ever and more than double the amount of battery storage the company deployed in the first quarter. The deployments led to record revenues ($3.014 billion) and gross profit ($740 million) for the unit.
The growth of the Energy business displayed strong operating leverage as well, with gross margins expanding to 24.6% in Q2 compared to 18.4% a year ago. Meanwhile, Tesla’s automotive gross margin slipped in Q2 to 18.5% from 19.2% a year ago.
In fact, the energy business’s gross profit of $740 million made up 16.3% of Tesla’s total gross profit, nearly triple the 6.1% it registered a year ago.
Tesla Energy is now making up more and more of the company’s overall profit. Analysts and investors are taking notice and comparing it to another fast-growing unit that operates within a tech behemoth: Amazon Web Services (AWS).
“Yeah, I would [compare it to AWS],” said Nancy Tengler, Laffer Tengler Investments CEO and chief investment officer, in an interview with Yahoo Finance, adding that the success of Tesla Energy and a tour of Tesla’s Lathrop facility drove the firm to add to its Tesla holdings.
“The growth [of Tesla Energy] has been impressive, the profitability — they are the lost cost producer in that segment, so we expect to see the growth really drive earnings in [the] next few years,” she said. Laffer Tengler funds hold approximately 11,270 shares of Tesla.
Earlier this month, Morgan Stanley’s Adam Jonas dubbed Tesla’s Q2 energy deployment storage figure a “show stealer,” noting the 9.4 GWh deployed was double the firm’s forecast.
Following Q2 results, Cantor Fitzgerald also upped its price target for Tesla to $245, citing the energy storage business.
“We are increasing our FY24 [Tesla] revenue estimate to $101.2B (from prior $100.6B), driven by an increase in our energy storage and deployment estimate. We now model 29GWh for FY24 (vs. prior 16.3GWh), which we now expect will translate into energy storage and deployment revenue of ~$9.6B (vs. prior ~$6.6B),” Cantor said in a note.
Stifel reiterated its $265 price target and Buy rating following results, noting, among other factors, that Tesla Energy revenue and margins “easily beat expectations” and growth appears “strong.”
Analysts at Baird also noted that “strength” in the Energy business and increasing regulatory credits that Tesla enjoys from EV sales will help offset headwinds from short-term weakness in auto margins. Baird has an Outperform rating and $265 price target.
Not all analysts believe Tesla Energy will be a savior for a Tesla currently mired in slipping overall gross margins. UBS analysts believe Tesla’s energy business success is already priced into the stock, noting the stock at current levels is mostly a bet on autonomy.
Jefferies noted the “growing importance” of Tesla Energy to gross profits, but analysts believe it isn’t enough of a factor to upgrade “current consensus,” which for Jefferies results in a $165 price target and Hold rating.
Nevertheless, Tesla Energy is a growing part of the Tesla web of ventures — from automotive, to charging, to AI, to services. And it might just be the most valuable in just a few years’ time, if it can keep up its profitable growth, just like Amazon’s AWS, which saw its revenue jump 17% year over year in the most recent quarter.
Pras Subramanian is a reporter for Yahoo Finance covering the auto industry. You can follow him on X and on Instagram.
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