Tesla (NASDAQ:TSLA) is most commonly known for its electric cars, and it is something that has brought a tremendous spotlight onto its founder Elon Musk. However, I think that Tesla's cars are but a short live side project, early in the life of an industry giant. Tesla has also made significant investment in the production of batteries. Their recent merger with SolarCity is a major testament to this fact.
In my opinion markets are confused and do not know how to properly value Tesla. Below will be my arguments as to why Tesla should be valued not as a car company, but mainly as a home energy production and storage solution supplier. This contributes to markets not pricing enough growth potential into Tesla's share-price. Because of this oversight, Tesla in an UNDERVALUED BUY opportunity.
In the US there is currently a major trend towards at home renewables. As it stands these at home solar panels are quite inefficient. You need to use the energy as soon as it is produced as there isn't any way to store it. This leads to much of what is produced being wasted during the day, when production peaks.
The Powerwall is the Cornerstone of the Home Energy Revolution
Tesla's home battery, the "Powerwall", is the solution. Without the capacity for energy storage, grid stability cannot be maintained when relying on renewable power generation. Between 2006 and early 2016, the number of US homes with solar panels grew from ~30,000 to over 1,000,000 (Business Insider). This is due in part to the significant decrease in the cost of outfitting your home (from about $9, to just $3.79 per watt), and the growing trends in environmental consciousness and regulatory incentives.
The fact that Tesla is fundamentally a battery producing company is largely overlooked by the investing community who tends to focus on where they are currently making their money and where the headlines are made. Their car business is but a small stepping stone in Musk's path for Tesla. As global auto manufacturers transition to investing in electric car development Tesla will be pushed out of the market. They do not have the production capacity, or cost structure to be able to compete with large, mainstream manufacturers. Tesla will not be able to scale production fast enough to capitalize on any sort of first mover advantage.
Demand Growth For Home Solar Installations - Good for Solar City Merger
The home solar panel industry has exploded in profitability with industry revenue expected to grow at 16.1% per year through to 2021. This is an affirmation of the demand explosion driving the home energy revolution. This is going to play a large role in bolstering demand for Tesla's home energy storage solutions.
Those who understand Tesla and follow them closely understand that where the firm's true value is generated is in their understanding of, and skill in making batteries. North America is in the first phases of an energy revolution where potential is shown but consumer adoption remains quite low. This is the proverbial "tip of the iceberg". Without companies like Tesla producing consumer energy storage solutions this shift will not occur any time soon. Musk and his brain-child are the key to unlocking the power of at-home clean energy production.
Tesla's battery potential is largely over shadowed by the fact that Tesla loses money on the production of a number of its cars, and that in its current form, it is largely dependent on government subsidy (receiving over $2 billion in government subsidy since 2012). This leads to markets being overly harsh in valuing Tesla. The lithium battery production market is expected to grow at 5.5% into 2021 (IBIS World). Of this market Tesla holds 3.8% second only to General Motors (3.9%), however, it is looking past purely automotive applications of these batteries. Tesla is being valued as if its competition are the auto-manufacturers, when they are the only firm who does what they do.
Tesla and Panasonic have entered an agreement to build the so-called Gigafactory in California. The Giga factory is expected to start operations later this year and reach full scale operations in 2020. Once fully operational this factory will be able to produce more lithium-ion batteries in than the entire world did in 2013 (Tesla Investor Handout).
At heart Tesla is a battery company, one that is plagued by the wrong perceptions of it being an auto-manufacturer. As such Tesla is quite undervalued on an intrinsic basis as investors look past its tremendous growth potential. While I hold concerns regarding Tesla and unpredictable investor sentiment in the short-run, I am long-run bullish on the company as it emerges as a battery generating powerhouse over the next 3 years.
Tesla is a company of the future and is well positioned to dominate the energy tech space moving forward. While I cannot say for certain exactly what Tesla's true value is, I do see it an on opportunity to buy, before markets realize that their auto business is but a growth on its side, holding down what will be a tremendously successful solar panel, and lithium-ion battery producer.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
Additional disclosure: This reflects the opinions of the author and in no way does it constitute investment advice. This is for educational purposes only.