Tesla Motors Inc (NASDAQ:TSLA) Battery Scheme Is a Bust (For Now)

Tesla Powerwall v GM Home Battery

Tesla Motors Inc is more than just a car-maker. This is not strange. Elon Musk wears many hats from EVs, to solar panels, and shooting rockets into space. New insights emerged about the Tesla Motors power cell segment “Tesla Energy” when the firm reported its second quarter earnings. Yet, it seems that the market was too busy with Model X and price movements to notice that Tesla has a cash cow in its energy business.

Tesla Powerwall v GM Home Battery

During the earnings call, Tesla revealed that its battery business is moving ahead at a blazing speed. Tesla Energy makes Powerwalls and Powerpack used for storing energy from solar panels or energy from the power grid. Tesla Energy units are being made in Fremont CA but the firm is moving to its Gigafactory in Nevada next year.

Exponential growth in battery sales

The energy business has 100,000reservations that are worth about $1B. Musk says they are non-binding orders; hence, Tesla hasn’t been paid for those orders. Elon Musk expects the orders to deliver between $40M and $45M in battery sales in Q4 2015.

By 2016, Tesla Motors battery sales should have a 10X jump to record sales between $400M and $450M in a quarter. By 2017, Musk says sales should reach “a few billion dollars”. In his words, “It’s sort of growing by a half order of magnitude to an order of magnitude per year”.

A great point to note is that Tesla has sold out all the energy units that it could produce in 2016. Tesla’s energy storage units have had a warm reception since they debuted in May. In the first few days after the official launch, the firm reported 38,000 orders. More than 2,500 firms showed an interest in buying the industrial-use Powerwall.

Tesla’s smart economies of scale for profits

Tesla Motors  battery business is likely to be bring in huge profits as Musk predicts gross margins starting from 15% and growing to 25% to 30% over time. The huge demand that Tesla has seen for its battery products should continue and the firm should enjoy the strength of large numbers.

The huge demand makes it easier for Tesla to produce the units at a cheaper price because bulk orders attract bigger discounts. The firm already has a factory big enough to meet demand forecasts in its Gigafactory. It was reported that one of the reasons Musk brought Gigafactory to Nevada was the low personnel cost, which is about 10% of expenses.

For now Tesla Motors is going to keep burning cash, and the battery business is likely to cost a lot more than it can bring in. Once the firm gets production rolling, however, the power cell segment may be one of the greatest assets it has.

A cheaper battery will have great impact on the costs of Tesla Motors’ EVs. Hence, the firm can expect to increase the margins on its cars as its energy business continues to succeed. The market is yet to see the impact of a synergy from the battery deal with the li-ion genius from Dalhousie Uni – when the pieces fall into place, Tesla Motors won’t be just another car maker.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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