The Sun Is Setting On Tesla's Solar Business

Summary

• In Q3, Tesla saw its solar installations rise 111% quarter over quarter and 33% year over year; Solar Roof installations tripled from Q2.
• Despite the ostensibly robust growth, total solar deployments were still far lower than had been the norm until 2016.
• Solar energy plays a key role in Tesla's growth narrative, differentiating it from other automakers as an "energy company that makes cars" and justifying its wildly divergent valuation multiple.
• The solar energy industry, constrained by effective commodity pricing, has left Tesla with no apparent competitive advantage; the Solar Roof, unveiled in 2016, has gained little traction to date.
• Tesla Solar’s ongoing struggles may damage investors’ perception of Tesla as an energy innovator, which may in turn weigh on the stock.

When Tesla (NASDAQ:TSLA) reported Q3 earnings in October, the company took great pains to highlight the growth in its solar energy business. Solar deployments rose a whopping 111% from the previous quarter to 57 megawatts. Things looked good on a year-over-year comparison as well, with deployments up 33% from Q3 2019.

Viewed on a wider timescale, however, Q3’s solar deployment growth is considerably less impressive. Indeed, it represents yet another quarter of stagnancy for a business segment that has been stuck in a multi-year downtrend.

Investors would be wise to pay attention to the red flags waving above Tesla’s solar segment. As Tesla’s solar energy narrative diverges ever further from its solar energy reality, the risks to the company’s vaulting valuation are set to intensify.

Shadows Gather Around Solar Segment

Tesla’s solar business has been in decline for years. A review of historical solar deployment levels puts the latest sequential uptick into stark perspective. Quarterly deployments reached their high water mark in Q4 2015 when Tesla installed 253 megawatts. But solar install numbers fell from there, reaching its nadir in Q2 2019 when it managed to deploy just 29 megawatts. Thus, while the 57 megawatts deployed in Q3 2020 may be twice what Tesla managed at its lowest point, it is less than 25% of what Tesla deployed during its best quarter.

Source: Tesla, TESLAcharts

Unsurprisingly, Tesla has attempted to shift focus away from total solar deployments and toward its Solar Roof, which has at last begun to see an uptick in installations after years of delays. First unveiled in October 2016 ahead of Tesla’s ill-fated acquisition of the collapsing SolarCity, the Solar Roof was meant to be a key differentiator in an increasingly commodity-priced solar industry.

Source: Tesla

While CEO Elon Musk assured investors at the time that the Solar Roof was ready to enter mass production almost immediately, it quickly became clear that the technology was far from ready.

Still Waiting On The Solar Roof

For years, Musk has repeatedly assured investors and customers alike of the Solar Roof’s imminent arrival. In late July 2019, he took to Twitter to pronounce that Tesla was at last gearing up for mass production, with production projected to reach a rate of 1,000 units per week by the end of the year. Yet three months later, fully three years after the initial product unveiling, barely a handful of installations had been completed. And Tesla has remained uncharacteristically reticent to disclose the actual number of installations to date.

Source: Elon Musk, Twitter

The efficiency of Solar Roof deployments appears to have improved over time. From the eleven days it reportedly took in late 2019, observed deployment times had fallen to as little as four days by October 2020, while Tesla claims it can now complete an installation in less than two days. Improved installation speed has likely boosted deployment volume, which tripled in Q3 according to Tesla.

Despite clear signs that the Solar Roof is seeing wider distribution than ever, few analysts have proven willing to hazard a guess as to actual installation volumes. After all, three times a very small number is still a very small number. Unfortunately, Tesla has not published any concrete installation numbers thus far, and the company has tended to demur whenever questioned on the subject.

Narrative Collides With Reality

For years, Elon Musk has spun the narrative that Tesla is not simply an electric vehicle business. Rather, Musk asserts, it is an energy company that also makes electric cars. Musk highlighted this idea yet again during Tesla’s Q2 earnings call in July:

“I can't emphasize [enough]. I think long term, Tesla Energy will be roughly the same size as Tesla Automotive."

Musk’s efforts to position Tesla as an energy company have been supported by a host of influential commentators and investors. Social Capital’s Chamath Palihapitiya, for example, has been a particularly ardent evangelist for Tesla’s energy segment. Speaking to CNBC on July 23rd, Palihapitiya laid his position out quite plainly:

“This stock is now going to represent the totality around decarbonization and sustainability, so it was really great to own this thing around cars for the first few years, I get it. But now I underwrite this stock as a push toward decarbonization, towards unregulated energy, and towards the ability for all of us to become our little micro utilities.”

By successfully positioning Tesla as an energy disruptor, its stock price can be uncoupled from the more prosaic earnings multiples garnered by other automakers. Thus far, Musk and his supporters have managed to shape the narrative quite effectively, which has played an instrumental part in elevating Tesla’s valuation to its current staggering level.

In reality, however, Tesla’s solar business has failed to live up to Musk's promises of rapid growth. Even the much delayed advent of Solar Roof has failed to lift deployment numbers appreciably. That can hardly be taken as a promising sign for the future.

Investor’s Eye View

Tesla has garnered a market capitalization in excess of $600 billion thanks to incredibly effective narrative management. The company has sold the market on its energy future. But the deployment numbers do not lie.

Thus far, Tesla’s share price has managed to escape unscathed. Whether it can continue to do so will depend on investors’ continued willingness to believe what they are told rather than what the financial results show.

In the long run, reality always wins. But it can be a long wait.

Analyst’s Disclosure: I am/we are short TSLA. 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.