Tesla's Not So Well Kept Secret Card

| About: Tesla Motors (TSLA)


Tesla makes the cheapest but still the best EV batteries out there.

SolarCity installs Tesla batteries in two different setups.

The Gigafactory output gives us clues about the availability of more batteries for energy storage.

The energy storage industry is expected to grow very fast and Tesla will likely be a leader in batteries.

Tesla (NASDAQ:TSLA) is the only auto manufacturer that is currently able to make and sell a car with a more than 200 mile range on batteries alone and they have been doing so since 2008. The reason being that Tesla has the highest energy density and cheapest pack by $/kWh amongst automotive batteries.

CEO Elon Musk has stated that he will be "disappointed" if they do not reduce the cost of the Tesla pack to $100/kWh in less than a decade.

SolarCity (NASDAQ:SCTY) has been selling Tesla battery packs to two different markets:

  • Residential Customers - Available for both backup power and for reduction of TOU charges. The company claims nationwide rollout by the end of 2014.
  • Commercial Customers - SolarCity offers a product called DemandLogic which optimizes power usage from solar, batteries and the grid to reduce electricity costs and avoid demand charges. SolarCity also guarantees the savings that the system will provide for 10 years.

As the global solar and wind deployment is expected to keep growing for the foreseeable future, the demand for energy storage will rise exponentially and nobody is better positioned than Tesla to take advantage of the situation.

Tesla's first battery factory (the Gigafactory) is expected to have output of 50GWh in batteries by 2020. Around the same time, Tesla says it expects an auto production capacity of 500,000 cars. Assuming that by then the average battery pack size would be 85kWh (the largest option available today), we have excess capacity of approximately 7.5GWh.

Tesla is the only company that has begun construction on such an ambitious battery factory, with more such factories to come after the first one. I expect Tesla will have the lead in energy storage batteries, just like it has in electric cars. Tesla also owns the domain TeslaEnergy.com and it currently redirects to TeslaMotors.com hinting at their energy future.

There are many Tesla shorts predicting the decline of the company, the peak sales for its cars (in spite of rising customer deposits), calling into question the valuation of the company based on the number of cars sold. A recent article calls Tesla the short of the decade. All this time, what is missed is that Tesla is borrowing and spending to build not just the best cars but also the world's biggest battery factory, which has a ready-made and very large market outside of the auto market waiting for it.

The DOE has "long term" goals of $100/kWh in energy storage costs and "near term" goals of $250/kWh of energy storage. It is likely that Tesla costs are already under $250/kWh and Tesla might be the first to get under $100/kWh on a large scale. Battery storage systems are currently much more expensive.

So once the Gigafactory is online and if it can produce batteries at $100/kWh, even if Tesla doesn't sell a single car, it is sitting on a high margin goldmine of battery sales because it is unlikely that anyone else will be ready to compete at the scale and price of Tesla's batteries.

Grid Scale Energy Storage is expected to be a very large market - $400B by 2020. The small scale market for residential and commercial buildings doesn't even enter the picture for estimates because current batteries are not economically viable. However, the availability of cheap batteries along with solar panels are likely to cause an exploding market in the next decade.

In conclusion, this is just the beginning for energy storage batteries and Tesla is well positioned to lead the pack (pun intended) in the future. What would Tesla be worth as a battery company? If Tesla is able to sell packs at $150/kWh with 25% margins, we are looking at revenues of $7.5B on 50GWh of packs and profits of $1.875B. With a P/E of 20, that represents a valuation of $37.5B in 2020, just from batteries.

Now that I've explored the potential of batteries for Tesla, I'll leave you with the Tesla Model 3 competition (a constant topic brought up by bears) to think about. What Tesla needs to do with the Model 3 is make their existing car smaller and cheaper and they have a plan - economies of scale by building the largest battery factory in the world. What the competition needs to do is prove that they can ever make such a car. Even if they manage to do that by some stroke of luck, they will lag behind in manufacturing scale and battery cost.

Disclosure: The author is long TSLA, SCTY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.