Tesla And SolarCity Continue To Expand Their Burgeoning Partnership

| About: Tesla Motors (TSLA)

Summary

Tesla and SolarCity are both benefiting tremendously from their mutual interest in cost-effective battery technology.

While the demand for Tesla's battery technology is undeniable, the company still has to follow through on its ambitious lithium-ion manufacturing plans.

SolarCity's growing appetite for Tesla's lithium-ion battery technology will likely play a large role in both companies' futures.

Tesla's (NASDAQ:TSLA) close relationship with SolarCity (NASDAQ:SCTY) is starting to have a major positive impact on both companies. Given Tesla and SolarCity's common need for cost-effective battery technology, the growing synergistic relationship between these two companies is to be expected. However, the degree at which these two companies are benefiting from each other is surprising to say the least.

To put some perspective on the growing synergy between these two companies, Tesla expects to sell 168.5 MWh of energy storage systems to SolarCity in 2016 alone. This figure represents a sixfold increase from 2015 and translates into $44 million of revenue for Tesla. Moreover, Tesla's anticipated 2016 SolarCity energy storage sales will be 60% larger than the total US behind-the-meter market in 2015. Given SolarCity's growth projections, the business relationship between these two companies will likely only expand moving forward.

The energy storage market is expected to expand rapidly in the coming years. SolarCity will likely play a big role in driving demand for energy storage technologies.

Click to enlarge

Source: GTM Research

Strategies Are Aligned

Cost-effective battery technology will play an increasingly large role in both Tesla and SolarCity's futures. As such, it is not surprising to see Tesla and SolarCity work together on the battery front. The combination of two industry standouts working towards a common vision should make success all the more likely. What is perhaps most advantageous for both companies are their relatively close-knit management teams, which makes communication and planning far easier.

As is already well known, Tesla CEO Elon Musk is SolarCity's chairman and the cousin of SolarCity's cofounders Lyndon Rive and Peter Rive (who are also the CEO and CTO respectively). The close-knit nature of Tesla and SolarCity's management teams should be a boon for both companies on the business front. As Tesla and SolarCity are expected to be the largest supplier and consumer of lithium-ion battery technologies, their ability to work well together should be hugely beneficial.

Tesla and SolarCity have already reaped the benefits of a close working relationship. SolarCity, for instance, had much longer to prepare for Tesla's Powerwall rollout given the company's relative foreknowledge of Tesla's plans. Tesla, on the other hand, was guaranteed demand from SolarCity. The strategic alliance between Tesla and SolarCity will likely only strengthen moving forward to the benefit of both companies.

Huge Opportunity

Batteries only account for a fraction of Tesla and SolarCity's business. However, battery technology is one of the most important components for both companies. In Tesla's case, cost-effective batteries are key to the company's electric vehicle affordability. In SolarCity's case, batteries will likely be increasingly essential for the company given the growing utility pushback. Cost-effective battery technology will allow SolarCity to lessen its dependence on the grid.

While battery technology is still relatively expensive, Tesla is attempting to bring down costs with its enormous lithium-ion Gigafactory. Tesla will only be able to bring down battery costs substantially in the near-term by massively scaling lithium-ion battery production. SolarCity is already helping Tesla on this end by guaranteeing enormous demand for Tesla's large anticipated supply of lithium-ion batteries.

Outside of Tesla's own business, SolarCity will likely be the single largest consumer of Tesla's lithium-ion batteries for the foreseeable future. Tesla already expects battery revenue from SolarCity to increase by 450% in 2016, which shows that SolarCity's appetite for batteries is enormous. Given SolarCity's growth rate, the company's demand for such technologies will likely continue to balloon in the coming years.

By offering such enormous demand, SolarCity will allow Tesla to scale up even more to further reduce costs. As a result, cheaper energy storage technology will be available to both Tesla and SolarCity. Of course, Tesla will also be able to profit enormously from its SolarCity sales. While Tesla markets itself primarily as a car company, the company is arguably transforming into the world's leading lithium-ion battery player. The revenue that the company will be able to acquire from rooftop solar companies alone is expected to be enormous.

Tesla has access to tens of millions of residential and commercial customers through companies like SolarCity. Assuming that Tesla makes a healthy profit from its battery sales (the company's 7 kWh Powerwall currently retails for $3000), Tesla will have an incredibly promising battery business. If SolarCity's current demand growth for Tesla's batteries is any indication, Tesla is being underestimated on the energy storage front.

With that being said, the future success of Tesla and SolarCity's energy storage ambitions is dependent upon Tesla's ability to follow through on its Gigafactory plans. Given the sheer scale and complexity of Tesla's Gigafactory, success is still far from guaranteed on this front. Fortunately for both companies, Elon Musk is well-known for his ability to succeed even in the toughest of environments.

Conclusion

SolarCity's rapidly growing demand for Tesla's battery technology is extremely promising for both companies. Given Tesla's booming electric car business (evident in the massive number of model 3 preorders) and the company's burgeoning battery technology business, Tesla still has room to grow at its current market capitalization of $33 billion. The company has a solid grip on some of the most promising emerging markets in electric cars and large-scale lithium-ion batteries.

Likewise, SolarCity is also undervalued at its current market capitalization of $3.3 billion. Given SolarCity's billions of dollars in NPV, robust growth rate, and unique partnership with Tesla, the company has a great deal of upside. Tesla and SolarCity will likely continue to benefit tremendously from each other's existence considering their mutual goals and close-knit management teams.

Disclosure: I am/we are long SCTY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.