I have long believed that the Tesla Solar Business (TSLA) was an overlooked part of Tesla and had the potential to be an important part of Tesla's future endeavors. However, I was not blind to the many mistakes of which perhaps the greatest is the production or the absence. As I will explain in this article, Tesla's energy division is finally taking the necessary steps to become an actual asset for Tesla, reversing the history of debt and disappointment. I'm also going to talk about how their energy business will make a profit, and I'm not just positive in quarterly reports, but also a return on the $ 2.6 billion SolarCity acquisition with additional debt of $ 3.25 billion over three years ago.
Production and Product Finishing
The solar roof is perhaps Tesla Energy's biggest disappointment to date. After being unveiled nearly three years ago, the product had difficulty leaving the production line and went through three different iterations. The slow production has even forced Panasonic (OTCPK: PCRFY), Tesla's exclusive photovoltaic solar cell manufacturer and partner at Gigafactory 2, to sell the Buffalo-made cells to foreign companies. However, this third iteration is finally ready to move to the mass market. According to Electrek, one of the most important changes that satisfied Musk was the customization that made possible an integrated solar roof. Musk was notorious for the aesthetics of the roof and wanted them to be perfect before mass production began, and it seems that this step has considerably eased his conscience. A patent granted for curved solar roof tiles to be used for the artificial terracotta design also improves the ease of installation and the aesthetics of the product. It seems that Tesla's biggest refinement of the solar roof was to boost production, which Musk (19459007) said would reach about 1,000 roofs a week by the end of the year. Of course, skeptics will point out the obvious. Musk has made many promises in terms of production and other aspects of the Tesla business that are completely inaccurate or simply misleading. This is not the case and can not be so. The reason why I believe this recent update is accurate is Musk's latest SEC deal and the lack of noise from the commission after the tweet. In addition, when asked about The Buffalo News's tweet, a Tesla spokesman did not refuse to comment on or retrace his CEO's statement, saying "the company had nothing to add except Musk's tweet." what was said and supported, while the company is now commenting. There is no doubt that this is a good product, but it was uncovered too soon, long before the production was really ready to go.
Tesla's solar products, however, are not limited to the solar roof. They also have a shop selling traditional solar panels. At Gigafactory 2, Tesla has a similar relationship to Panasonic as Gigafactory 1. Instead of making the battery cells, Panasonic manufactures the photovoltaic cells ("PV") used in Tesla's panels. These PV cells are the same as those used in the solar roof, but unlike battery production at Gigafactory 1, they have never been a production bottleneck. Instead, Tesla remained behind dramatically behind Panasonic's production, forcing them to sell their PV cells to external buyers in order to benefit from the facility. While I have already talked about Tesla's goals of increasing the production of solar roofs, the overall solar modules look different. It was expected that the factory itself would reach an annual production of 1 GW or 10,000 panels per day until further analysis allowed Tesla to increase its expected output to 2 GW. This ultimate production goal will provide insight into Tesla's solar production, which will be beyond the solar roof. Assuming that Tesla will ultimately remain at 1,000 solar roofs per week, Tesla will be able to produce ~ 2,205 complete solar systems per week, or ~ 114,667 systems per year at 1 GW, but this will be ~ 5,410 per week or ~ 281,333 Improve annually at 2 GW (these figures are less solar roof output), peak production (estimate based on the average size of the solar system in the US, and calculations by the author).
This ramp should be much easier to reach than the solar roof, which is more of a technical product, because all it really needs is the somewhat quick assembly of Panasonic's PV cells. I assume that by the end of the third quarter of 2020, the solar roof will reach a production of 1,000 roofs per week. By the end of 2020, Tesla will be able to achieve 1 GW of traditional output. The solar modules have also reached their target output of 2,205 per week by the end of 2020. However, Tesla is expected to need by the end of the second quarter of 2022 to reach its target of 5,410 solar cells per week. I believe that I am confident that this ramp is largely accurate as Tesla has committed to a final design for the solar roof and seems ready to begin mass production. The panels themselves are less technically difficult, and with the approaching demands on employment (to be discussed later), Tesla strives to increase production.
Tesla's solar products are also expected to be in high demand, especially for the Solar roof. The traditional solar panels from Tesla are nothing special, they look almost the same as the average solar panels, but the solar roof is different. The solar roof is a unique product that is a compelling option for people who prefer solar energy but do not like the look. The solar roof is also able to meet all the requirements of a traditional roof, such as insulation and protection, and Tesla even claims that it works much better in these areas than a traditional shingled roof lifelong guarantee for the shingle itself (note that the solar generation is only guaranteed for 30 years). A new Californian law requiring that all new homes be built in 2020 and then solar panels installed on the roof will obviously have a dramatic impact on the state's solar installations. Analysts assume that Tesla's solar roof alone in California will install 100,000 solar panels per year. There will be a dramatically larger market than it can make out. Tesla boasts that the solar roof is cheaper than the total cost of a traditional roof with solar cells. This particular point makes the solar roof very attractive for Californians building their new homes, requiring both a roof and a solar system. It is unlikely that a customer who does not need a new roof will consider this product unless he has sufficient financial resources, as this makes the solar roof much more expensive than just the solar roof alone. With more than five million new roofs being built each year in the US, Tesla is likely to be able to capture a significant portion of those who desire solar energy. Even just 1% of this market would probably be more than Tesla could ever spot, giving them a strong demand for longevity. In addition, the product has already shown great interest, demonstrating the marketability of the product and the ideas expressed in this paragraph. With all these new roofs each year, Tesla's solar roof is likely to be the main candidate for people who, due to their slim appearance and affordability, are choosing to exceed their production.
Tesla's traditional solar modules will not suffer from the strong demand of the solar roof. In fact, they too will see an increase. The fast-growing Californian market will certainly not hurt, but the introduction of a new solar thermal home pricing system, a subscription service, as Tesla puts it, for only $ 50 a month without a long-term contract is likely to help. Tesla's own solar offer is for a wider audience even more attractive. Tesla claims that this product generates a positive net cash flow for the owner, based on reduced utility bills and the ability to sell electricity back to the grid. With this offer, Tesla still technically owns the solar modules, but all the electricity generated by the modules flows directly to the house where they were installed. Owners can cancel the contract at any time and decide if they want to leave the dormant panels on their roof or have them removed for $ 1,500. This move fee allows Tesla to avoid real system losses as they can resell the units. Customers also have the option to purchase a system of the same size for $ 10,773 in advance. All states offer their own subsidies for the purchase of solar panels, which often leads to a dramatic fall in prices. Tesla lowered the price of these systems to well below the national average, to $ 1.75 per kWh, as opposed to the national average of $ 2.09 per kWh. With these low prices and fast installations, Tesla is improving its product offering, especially when compared to competitors. The subscription service that Tesla offers for its solar modules is likely to be an incredibly strong high-demand product offering, as there is nothing like it on the market and a very attractive financing option for most customers. While some also want to buy the panels in advance as they would rather own the panels themselves, Tesla should also see a strong demand for the traditional solar panels. Tesla's solar module installation initiative 24 hours after ordering is also expected to improve demand as customers seek to get and install their modules as quickly as possible. In contrast to the solar roof, however, the panels are not only used in residential areas. With the rapidly growing solar market, which is expected to reach $ 22.9 billion by 2025, Tesla will be able to sustain the high demand for its traditional solar modules through large commercial and potential utility projects for all its energy projects Musk announced that they will begin to sell their solar products in Europe. Tesla already offers the Powerwall in Europe, even though there is a massive backlog in America, which can now be coupled with Tesla Solar on customer request. Even if this is not the case, Tesla should see a big market for its solar products in Europe. Europe has a fairly large solar market, with 11 GW of installed solar modules in 2018, even larger than in the US. In addition to the 10.6 GW installed solar modules in the US in 2018, Tesla would only need to capture 4.6% of both markets to sell all its solar products, even before market growth. In the US, solar systems are expected to reach 15 GW per year by 2024, and similar growth is expected in Europe. While Tesla in America should see sufficient demand for its solar products, the addition of Europe to its customer base will guarantee an incredibly large market.
Tesla's solar modules cost $ 2,636.05 per kW (the author's calculations using Tesla sales information), while the solar roof currently costs $ 6,839.58 per kW, though Musk claims it still continues can lower. For this analysis, I verifiably use more reliable and more probable costs of $ 6,839.58 per kW. The target margin for their traditional solar module is likely to be 20% above the industry standard of 15.2% (based on the latest quarterly reports from JinkoSolar (NYSE: JKS), JA Solar (now private) and Trina Solar (now private) private)), which is also standard for other Tesla products. The solar roof is expected to have a margin of around 25%. Tesla has been targeting this margin for its vehicles for years, and since this product is more expensive and more specialized, it will probably have a slightly higher margin than most premium products. Similar to Model S and Model X, it is a product with lower production and higher profit margin. In addition, 25% is only slightly higher than the 20% margin of standard solar energy, so this is a feasible margin that can be maintained. I also assume that Tesla's subscription service will attract approximately 25% of solar module customers. This is supported by the system's competitive pricing, but is limited by the disadvantage of not owning the system. Using the above production ramp, margins (assuming margins tend to be lower at the beginning of a production ramp) and financing options, Tesla will achieve a gross profit of $ 350 million in 2020, $ 2,021,491 million in 2021 and $ 470 million in 2022. and $ 406 million in 2023 and beyond for solar products (Tesla's upfront solar subscription fees were deducted monthly from the estimates, with subscription payments totaling $ 13,157 per month and kW). The reason these numbers decline despite increasing overall production is that subscription solar costs are only 25% higher than the other traditional Tesla modules. As Tesla recovers the production of solar roofs, it burdens its own profit margins.
Tesla's Solar Subscription Service will take a little less than 18 years to cover the cost of purchasing the solar system. This means it will take a while to get these up Actually manifest gains and drastically reduce initial profits. Tesla owns $ 6.2 billion worth of solar modules left over from SolarCity's own leasing days and will continue to increase that number through its subscription service. Tesla also acquired $ 3.25 billion in SolarCity debt, bringing the total cost of the acquisition to $ 5.85 billion. Thus, the products developed under the SolarCity brand with Tesla may cover the acquisition costs in due course – just over 14 years .
Controversy and Risk
There has recently picked up the controversy over the acquisition of SolarCity. At that time, Tesla used the solar roof to justify the acquisition. However, three years have passed and we still do not see the product being mass-produced. In addition, Tesla, a financially troubled company, was forced to pay $ 2.6 billion to acquire SolarCity and assume its debt of $ 3.25 billion. That was the real kicker. The company went down, but Tesla was still pushing for the merger to take place anyway. To this day, I believe Tesla will be getting worse and worse with this acquisition and that should not have happened. After all, most of the products discussed above do not rely on SolarCity at all, and even the solar roof would probably have worked without SolarCity. The PV cells themselves are manufactured by Panasonic, and the solar roof is a technology made by Tesla. The early announcement of the solar roof is also a direct result of this acquisition, which has been highly criticized by the company. In essence, I agree with the indignation of the investors, but do not believe that the lawsuit will be anything. I think that's because Musk can probably hide behind the fact that he does not vote on the acquisition and the overwhelming support of Tesla's shareholders at the time of the acquisition. While this lawsuit against Musk and Tesla is likely to be lost, the anger over this acquisition is certainly justified.
Another important consideration is the Variable Rate Equity Obligations (VIE) that Tesla acquired with the acquisition of SolarCity, a topic I will briefly summarize. Tesla has acquired $ 1.289 billion worth of VIE commitments. These loans are often borrowed from Tesla's operating cash flow. This makes it increasingly difficult for Tesla to achieve profitability and has therefore affected Tesla's business, as its profitability is often at the forefront of investors. In addition to SolarCity's debt, Tesla was now forced to assume these VIE commitments, which impacted overall profitability and profit margins.
Tesla's controversy does not end with the acquisition of SolarCity. Tesla's second Gigafactory facility in Buffalo, New York, is responsible for manufacturing Tesla's solar products. More importantly, Gigafactory 2 will provide 1,460 jobs by the end of April 2020. If Tesla can not do this, it will charge $ 41.2 million. For each year, they will not meet this requirement. All this happened because Tesla received $ 750 million to subsidize the construction of the factory as long as they promised to reach certain employment levels, of which they hit the first in April this year. If Tesla is indeed able to drive production as high as expected, the company will likely be able to meet this labor demand, and Governor Andrew Cuomo has stated, "It's all about trust – and A contract is a contract. "In fact, it would probably be cheaper for Tesla to cover the costs of hiring unnecessary employees than to pay the $ 41.2 million for non-compliance. Nevertheless, Tesla would probably not want useless factory workers forced to increase their productions to be more efficient. Even if Tesla is unable to successfully increase its production, they will not be affected by this penalty, as it does not make financial sense to avoid hiring them.
Apart from the controversy, the associated risks are with this thesis. Two of the biggest problems were the lack of deployment infrastructure and the cost of the front of these solar panels. The latter were the cause of the financial distress of SolarCity. Tesla is already financially distressed and is unlikely to afford to incur additional debt in addition to its current debt of $ 11.366 billion. With $ 5 billion in cash, the highest level in Tesla's history, they currently have relatively strong liquidity, which could cover some of the cost of this business, but is likely to be unsustainable for the company. In the long term, this fronting business will be profitable for Tesla, but given the current financial situation, they simply can not afford to wait 18 years for break even. If Tesla topped the cost of each solar module, it would cost $ 1.451 billion per year (author's calculations using previously disclosed information). While this may not be all of their liquidity, it is a fairly significant part that will be used to avoid being seen for another 18 years. Even though a large proportion of Tesla's customers will buy the panels in advance, Tesla has to end this deal before it overburdens the finances, probably within a year. However, I have left the analysis with much weaker numbers, as Tesla may sustain this initially unprofitable business. If Tesla were to exit this business after 2021, they would achieve a gross profit of $ 1.167 billion in 2022 and a gross profit of $ 1.423 billion in 2023. These substantially higher profits show the greater success that Tesla would see in dropping their profits subscription service, but it seems that they currently want to prioritize the growth before the profit in the solar industry.
Falling sales are not important, although some point to a lack of demand. This is not the case, as I have already discussed in this article. Demand for Tesla's solar products continues to be high. The reason why Tesla started dropping its solar panels is as simple as lack of supply and lack of focus. Tesla focused on the production and success of its vehicles and not so much on the solar industry when it launched its Model 3 sedan. As a result, production problems remained unresolved and Tesla did not provide enough panels to retrofit houses. The elimination of solar retrofits was certainly a symptom of a problem with Tesla, even though it was a logistics and production problem, not a demand problem. The logistical problem also seems to be resolved with the 24-hour installation and the new fixtures discussed earlier, which should make the installations even faster. These faster installations not only allow for higher margins and increased demand due to reduced construction costs, but also allow Tesla to complete more installations as they can process their backlog much faster, without worrying about hiring many new people
Last but not least, Tesla faces a lawsuit by Walmart (NYSE: WMT) over faulty solar panels that have caused fires in several locations. First of all, I would like to clarify that solar panels should not catch on fire and that such an event is very rare indeed. The Tesla-Walmart events, reported by Reuters, show that Tesla was unable to fix the panel-related issues several times after the acquisition of SolarCity, even though the problem arose prior to SolarCity's acquisition. Honestly, Tesla should not win this lawsuit, as it seems they had several chances to fix the problem and failed each time. Although Tesla seems to have improved its installation and inspection methods since the fires, they should still be held accountable for their past mistakes. This suit will probably force Tesla to pay the cost of the systems themselves, although I do not think this suit is an indication of Tesla's current practice. While Tesla was probably wrong here, I believe they will not have any problems with fires in the future.
Disclosure: I am / we are long TSLA. I wrote this article myself and it expresses my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose shares are mentioned in this article.