Tesla’s energy business: Faster growing and now more profitable than the auto business

On Wednesday, electric vehicles (EV) pioneer Tesla (TSLA -3.69%) posted third-quarter 2023 results that disappointed investors, who sent shares down 9.3% on Thursday. That reaction stems from several factors: revenue and earnings missing Wall Street’s expectations, the continued decline in gross margin as a result of the company’s ongoing car price cuts, and CEO Elon Musk’s cautious tone on earnings.

But there was an electrifying bright spot in Tesla’s third-quarter report: the performance of its energy generation and storage segment. This business has two parts – energy storage and solar energy. The former’s products include lithium-ion battery-based stationary energy storage systems (Powerwall for residential buildings, Powerpack for businesses and Megapack for utilities and large-scale commercial projects), while solar’s products include solar panels and solar roof tiles.

Let’s dive into this business that doesn’t get enough attention.

Image source: Getty Images.

Tesla’s energy business now accounts for nearly 7% of total revenue and more than 9% of gross profit for the 2022 quarters:

Neighborhood Energy business percentage of total revenue Energy business percentage of total gross profit
Third quarter 2023 6.7% 9.1%
Q2 2023 6.1% 6.1%
Q1 2023 6.6% 3.7%
Fourth quarter 2022 5.4% 2.8%
Third quarter 2022 5.2% 1.9%
Second quarter of 2022 5.1% 2.3%
First quarter of 2022 3.3% N/A: segment had negative gross profit

Data source: Tesla. Author’s calculations.

There are two reasons why Tesla’s energy segment’s percentage of the company’s total revenue and earnings has grown faster in recent quarters. First, its revenue and gross profit are growing in absolute or dollar terms. Second, the core automotive segment’s revenue growth has slowed and its profitability has declined.

Tesla’s “services and other” segment is not included in the rankings, as the focus of this article is the energy segment. Also, although the service business is profitable, it has little effect on the company’s overall profits. In the third quarter, it contributed 3.1% to gross profit, while the energy business contributed almost three times that percentage.

If all goes well with Tesla’s plans, the services business should eventually contribute more to the company’s profits. As one example, the company’s paid Supercharging business, which is profitable according to the third-quarter release, is poised to grow because other automakers have adopted Tesla’s charging connector system, the North American Charging Standard (NACS).

Tesla’s energy business has grown revenue faster than its auto business over the past 4 quarters

For context, here are the absolute numbers for the third quarter of 2023: Total revenue rose 9% year-over-year to $23.35 billion, just short of Wall Street’s $24.1 billion estimate. Automotive segment revenue increased 5% to $19.63 billion, energy generation and storage revenue jumped 40% to $1.56 billion, and services and other segment revenue jumped 32% to $2.17 billion.

Neighborhood Energy business revenue growth on an annual basis Year-over-year revenue growth of the automotive business Year-over-year growth in total revenue
Third quarter 2023 40% 5% 9%
Q2 2023 74% 46% 47%
Q1 2023 148% 18% 24%
Fourth quarter 2022 90%* 33% 37%
Third quarter 2022 39* 55% 56%
Second quarter of 2022 8%* 43% 42%
First quarter of 2022 25* 87% 81%

Data source: Tesla. *Author’s calculations. YOY = year over year.

In the third quarter of 2023, as I wrote in my earnings article, the energy segment’s growth was “driven by a 90% increase in energy storage capacity deployment to a record 3.98 gigawatt hours (GWh).” That strong growth more of offset the poor performance of the solar business as “solar deployment fell 48% to 49 megawatts (MW), which the company attributed to “sustained high interest rates and the end of net metering in California.” ”

Apart from the last reported quarter, growth in the energy segment was fueled by the stationary storage business. Specifically, the main driver of growth is the strong demand for mega packages.

You might be wondering what happened to the slow growth of the energy segment in the second quarter of 2022. This was a period when the global semiconductor shortage was at its worst. So Tesla couldn’t meet the strong demand for its energy storage products.

The gross profits of the energy business are also growing rapidly

Neighborhood Year-on-year gross profit growth of the energy business* Year-on-year gross profit growth of the automotive business* Total gross profit growth on an annual basis
Third quarter 2023 266% (30%) (22%)
Q2 2023 187% 0% 7%
Q1 2023 N/A – reversed to positive from negative. (24%) (17%)
Fourth quarter 2022 Same as above. 13% 19%
Third quarter 2022 3367%** 42% 47%
Second quarter of 2022 385% 41% 47%
First quarter of 2022 N/A-Negative for period and year-ago period. 132% 147%

Data source: Tesla. *Author’s calculations. **This percentage is so huge because the gross profit from a year ago was a small positive number. YOY = year over year.

Over the past few quarters, Tesla’s energy segment has helped cushion the blow to overall gross profit growth that stems from declining (Q1 and Q3 2023) or flat (Q2 2023) gross profit growth in the automotive segment.

Tesla’s energy segment is already more profitable than its auto segment

Neighborhood Energy Business Gross Margin* Gross margin of the automotive business Total gross margin
Third quarter 2023 24.4% 18.7%* 17.9%
Q2 2023 18.4% 19.2%* 18.2%
Q1 2023 11% 21.1%* 19.3%
Fourth quarter 2022 12.1% 25.9% 23.8%
Third quarter 2022 9.3% 27.9% 25.1%
Second quarter of 2022 11.2% 27.9% 25%
First quarter of 2022 (11.7%) 32.9% 29.1%

Data source: Tesla. *Author’s calculations.

The third quarter of 2023 was the first quarter in which Tesla’s energy segment gross margin exceeded its automotive segment gross margin.

Many avenues for long-term growth

In the third quarter of 2023, Tesla’s energy and services segments combined accounted for 16% and 12% of the company’s total revenue and gross profit, respectively. These percentages look poised to continue rising. The energy business already contributes significantly to the company’s profitability and both segments have significant long-term growth potential.

In short, Tesla is much more than just an electric car manufacturer. So investors should focus on the company’s overall performance and overall long-term growth potential, rather than focusing exclusively or almost exclusively on the auto business.

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