Tesla Energy Storage Massively In Red

| About: Tesla, Inc. (TSLA)
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Summary

Segment had almost negative 29% gross margin in Q4.

Even before that, gross margin was negative.

SolarCity deal makes even more sense now.

If there was one bright side to Tesla's (NASDAQ:TSLA) acquisition of SolarCity, it is that the solar name will make Tesla's gross margins look better. Based on the 10-K filing, SolarCity reported an extremely nice 34.42% gross margin figure for all of 2016. That's much better than Tesla's automotive segment is doing, and it also is helping to hide the really bad performance from the rest of Tesla's energy storage business.

Between Tesla's 10-K filing and the Q4 investor letter, we learned some key facts about Tesla's energy storage business as well as the SolarCity segment post deal close. Here are just a couple of Q4 highlights. Remember, the SolarCity deal closed on November 21, so we're talking about less than half a quarter of results:

  • Energy storage and generation revenues: $131.385 million.
  • Energy storage and generation Q4 gross margin: 2.7%.
  • SolarCity added $84.1 million of revenues in Q4.
  • SolarCity added $67.0 million to the cost of revenues in Q4.

Using these numbers as well as the yearly totals, simple math tells us that SolarCity had a gross margin of $17.1 million for Q4, or about 20.3%. That's quite significant, because Tesla's entire energy business only reported a gross profit of just over $3 million for all of 2016. That implies that ex-SolarCity, Tesla's energy business had a negative gross margin of $14 million!

Now for the whole year, Tesla's energy business ex-SolarCity had revenues of a little more than $97 million. Based on the number above, that means that the segment had a negative gross margin of 14.4%, and this is before any operating expenses! Worse yet, in Q4 of 2016, it appears that the energy business had revenues of $47.3 million and a negative gross margin of $13.55 million, or a negative gross margin of more than 28.6%!

Now in Tesla's investor letter, the company gave the following statement about gross margins, and there is similar wording in the 10-K about this segment:

Q4 Energy generation and storage gross margin was lower than planned as we scaled production capacity in Q4 for our energy storage products to accommodate future growth.

Here's where things get interesting. If we take out SolarCity and the energy revenues from Q4, Tesla's energy business had about $50 million of revenues in the first nine months of the year. What was the cost of those revenues? Well, about $50.5 million, implying a negative gross margin of nearly 1%. So before the company was scaling for growth, the gross margin was already negative.

The SolarCity acquisition definitely appears to be hiding miserable results from Tesla's energy business. Remember, the acquisition provided 64% of the segment's revenues, and that was in just about 41 of the quarter's 92 days. Tesla says its overall energy business (including solar) should eventually get to automotive like gross margins, but SolarCity itself was at 34% for all of 2016.

With SolarCity being a large chunk of the segment's revenues, it means that the rest of Tesla's energy business will be extremely low margin for quite some time. That is, if it can get to positive territory, and remember, this is just the gross margin figure. Add in operating expenses, as well as the interest costs involved with the debt around these assets, and Tesla's energy business is well in the red.

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