One of the key themes that one hears from Tesla Motors (NASDAQ:TSLA) CEO Elon Musk is how he likes to improve customer experience and why vertical integration is the key to make that happen.
We believe this argument can work in certain situation but lacks merit more often than not. In the case of the proposed SolarCity (SCTY) acquisition, we find the argument about integration, as well as the argument about synergies to be utter nonsense.
There are, however, some situation where vertical integration makes eminent sense. During the conference call the Company conducted to justify SolarCity acquisition, Mr. Musk let slip a nugget about future storage product where vertical integration could make sense. He said:
"And it just became increasingly obvious that as we're developing the Powerwall and new versions of the Powerwall, particularly as we integrate more of the inverter electronics and intelligence in the Powerwall, you really need to take the solar panels and the solar system into account when doing that."
We believe that it is fundamentally a solid move to integrate inverters into batteries for some applications. A few applications where we see inverter integration making good sense are:
- Modular AC battery: This class of batteries are exemplified by the AC Battery Enphase (NASDAQ:ENPH) is planning to offer to its customer starting this August. Customer can plug these batteries into standard AC outlets and create scalable storage across a house or a business. Integration of inverter makes these AC batteries a simple plug and play proposition - something very much to Mr. Musk's liking.
- Solar system with integrated battery: This class of systems, as the name indicates, are systems optimized for solar + battery setup. In this situation the inverter integration can significantly reduce the product cost and installation cost.
- Mobility battery: This class of batteries will work in conjunction with a car charger. The application here would be to charge the battery when the cost of energy is low and let an automobile (or the home) draw from the battery at the time energy is most expensive.
To be sure, because of the high cost of storage, none of these applications make economic sense today. However, as battery costs drop and as utility companies move to Time of Use rates and demand charge based plans, these applications will start making sense.
In these applications, there is little doubt that integrating inverters could reduce cost, simplify installation, reduce maintenance, and improve overall customer experience. However, Tesla has no known inverter competency in house. So, will they be developing it in-house or partnering with someone?
It is well known that SolarEdge (NASDAQ:SEDG) was Tesla's partner with the first generation Powerwall. It is also well known that SolarEdge is now leading the industry with its HD Wave technology. Two of the compelling advantages of HD Wave are its weight and size. Given that batteries are heavy and big, a smaller light weight inverter can go a long way in making an integrated inverter + battery product more attractive. This will reduce the cost, weight, simplify installation and potentially improve aesthetics and customer experience.
Due to these factors, given HD Wave's clear superiority to current crop of inverters, we find it likely that Tesla is working with SolarEdge in some capacity as it relates to the future products that Musk mentioned on the call.
Given Tesla's big energy push and big promises and for Powerwall and Powerpack, does it make sense for Tesla to acquire SolarEdge?
We do not believe the economics justify such a move. The nascency of the battery market and the low volumes that Tesla is likely to see for Powerwall class of products for the near future mean that Tesla's volumes on these inverters will be very limited for years to come.
However, Musk's penchant for vertical integration might make SolarEdge a target. While such an acquisition is not something we could get excited about, it would be far less disastrous than acquiring SolarCity.
What is far more likely, and beneficial to both sides, is some kind of collaborative agreement where the parties agree to a partnership where SolarEdge's IP gets integrated into Tesla storage projects.
All things considered, we see the product roadmap discussed by Musk to be beneficial to SolarEdge.
Our View On Solar Edge: Buy
Disclosure: I am/we are long SEDG.
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.