Two Years In, Tesla’s SolarCity Deal Looks Increasingly Like A Bad Bet

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Tesla (NYSE:TSLA) acquired residential solar installer Solar City in late 2016 with the ambition of creating a vertically integrated renewable energy company, that marries electricity generation, storage, and sustainable transportation. However, almost two years later, the acquisition doesn’t appear to be living up to expectations, with the company’s solar installations trending lower and new product launches seeing delays. This could be concerning to investors, considering that the deal cost close to $5 billion (Tesla issued about $2 billion in stock and assumed around $2.9 billion of SolarCity’s net debt). In this note, we take a look at how these operations are faring.

Our interactive dashboard analysis outlines our expectations from Tesla over 2018. You can modify the drivers (in blue dots) to arrive at your own estimates for the company’s revenues and earnings.

Solar Installations Are Trending Lower 

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Over the second quarter, the company’s energy generation and storage segment generated revenues of about $375 million accounting for under 10% of Tesla’s total revenues. While this marks an increase of about 30% on a year-over-year basis, the revenues also include sales of Tesla’s Powerwall battery system as well as larger-scale energy storage projects, which are part of Tesla’s battery operations and are not directly related to its SolarCity purchase. Although Tesla doesn’t provide a break-up of storage versus panel revenues, we believe it’s likely that the storage solutions are outperforming the solar installation business. Over Q2 2018, the company deployed 84 MW of energy generation and 203 MWh of energy storage products. In comparison, in the year-ago period, the company deployed 176 MW of solar energy generation systems and 97 MWh of energy storage systems.

Why Is The Business Underperforming?

There are likely to be multiple trends, including internal and external factors, driving the underperformance. While Tesla’s big advantage was supposed to be its differentiated products, it hasn’t been able to deliver on this front as yet. The company’s much-publicized solar roof, which is designed to look like a regular roof while generating electricity, has only seen 12 installations connected to the grid in all of Northern California, one of the largest solar markets in the U.S. The product, which was unveiled in 2016, has seen delays as Tesla iterates on the product design and production process. Moreover, the conventional panels that Tesla is currently shipping are apparently rebranded Panasonic panels.

Tesla also appears to be scaling down the business to make it more efficient. The company’s recent restructuring and layoffs, which cut its workforce by 9%, apparently sharply downsized the residential solar business that it acquired from SolarCity. The company also ended its partnership with Home Depot, which reportedly accounted for about half of its sales and gave it access to about 800 stores. While it is part of Tesla’s strategy to shift sales to Tesla showrooms (which are located in high-visibility areas) and its website, it could be limiting the company’s reach.

There could be other market-related factors at play as well. According to a study by the National Renewable Energy Lab (NREL) quotes for residential solar installations by large players were priced at about $0.33 higher per watt (about 10% higher) compared to smaller regional installers.  Moreover, the solar markets are moving towards a phase of oversupply, with China significantly reducing its installations targets. This could put pressure on average selling prices, hurting Tesla’s solar business.

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