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Tesla: Solar Is On The Rise – Tesla, Inc. (NASDAQ: TSLA)




I have long believed that the Tesla (TSLA) solar industry 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, perhaps the biggest of them is the production, or the lack of them. As I will discuss in this article, Tesla's energy division is finally taking the necessary steps to become an actual asset to Tesla, reversing the history of debt and disappointment. I will also discuss how their energy division will make a profit, and I mean not only to be a net positive in quarterly reports, but also to provide a return on the $ 2.6 billion SolarCity acquisition, with a debt of an additional $ 3.25 billion dollars, just over three years ago.

Production and product refinement

The solar roof is perhaps Tesla Energy's biggest disappointment to date. After it was revealed almost three years ago, the product has struggled to get beyond the production line and has gone through three different iterations. Slow production has even forced Panasonic (OTCPK: PCRFY), Tesla's exclusive solar cell manufacturer and partner on Gigafactory 2, to sell the cells produced in Buffalo 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 custom fittings, which allowed for a more integrated sunroof. Musk was notoriously particularly attentive to the aesthetics of the roof, and wanted them to be perfect before mass production began, and it seems that this step has eased his conscience quite considerably. In addition, a patent granted for curved sunroof roofs, to be used on faux terracotta designs, further enhances the product's installation ability and aesthetics. It appears that Tesla's largest solar roof processing operation has ramped up production, which according to Musk is expected to reach ~ 1000 roofs per week by the end of the year. Of course, skeptics will point out the obvious. Musk has made many promises about production and other aspects of Tesla's business that are wildly inaccurate or just plain misleading. However, this is not and cannot be one of them. The reason I think this latest update is accurate is because of Musk's recent SEC deal and the lack of noise from the commission after the tweet. In addition, when asked about the tweet by The Buffalo News, a spokesman for Tesla declined to comment or try to backtrack on their CEO's statement, instead saying "the company had nothing to add, beyond Musk's tweet." the answer both acknowledges what was said and supports it as the company now stands by the remark. There is no doubt that this is a good product, but it suffered from being revealed too soon, long before production was really ready to start.

Source: Tesla

However, Tesla's solar products are not limited to the solar roof, they also have a business with traditional solar panels. On Gigafactory 2, Tesla has a similar relationship with Panasonic as they do on Gigafactory 1. However, instead of producing the battery cells, Panasonic produces the photovoltaic cells ("PV") used in Tesla's panels. These PV cells are the same ones used in the sunroof, but they have never been a bottleneck for production, unlike the battery production at Gigafactory 1. Instead, Tesla has dramatically lagged behind Panasonic's production, forcing them to sell their PV cells to outside buyers to make money on the plant. Although I have already discussed Tesla's goal of increasing their Solar Roof production, their solar panels are a completely different story. The factory itself was expected to reach an annual output of 1 GW, or 10,000 panels per day, until further analysis allowed Tesla to upgrade its expected power to 2 GW. This ultimate production goal provides some insight into what Tesla's solar production will be beyond the solar roof. Assuming that Tesla will eventually reach 1,000 solar roofs per week, Tesla will be able to produce ~ 2,205 complete solar systems per week, or ~ 114,667 systems annually at 1 GW, but this will improve to ~ 5,410 per week, or ~ 281,333 annually at 2 GW (to clarify, these figures are deducted from Solar Roof production), at peak production (estimate based on average home solar system size in the US and author calculations).

This ramp should be much easier to implement than Solar Roof, which is quite a bit more of a technical product, since all it really requires is the rather fast assembly of Panasonic's PV cells. I expect that even if the original intention was for the end of this year, Solar Roof will achieve 1000 roofs per week by the end of Q3 2020. By the end of 2020, Tesla will be able to produce 1 GW of traditional solar panels will reach their target production of 2,205 per week also by the end of 2020. However, Tesla will probably take to the end of Q2 2022 to reach its target of 5,410 solar panels per week. I think I feel confident that this ramp will largely be accurate because Tesla has decided on a final design for Solar Roof and seems ready to actually start volume production. The panels themselves have much less technical difficulties, and with employment requirements approaching (to be discussed more later), Tesla has the drive to ramp up production.

Requirements

Tesla's solar products should also see great demand, Solar Special Ceilings. Tesla's traditional solar panels are nothing special, they look pretty much like the average panel, but the sunroof is different. Solar Roof is a one-of-a-kind product that creates a compelling alternative for people who want sun but don't like the look of it. Solar Roof is also able to meet all the needs of a traditional roof, such as insulation and protection, and Tesla even claims that it works significantly better than a traditional hell roof in these areas, with Tesla even daring to provides lifetime guarantee for the shingles themselves (note that solar production is only guaranteed for 30 years). A new California law, which requires all new homes built in 2020 and after using solar energy, will obviously have a dramatic impact on the state's solar power plants, with analysts expecting this to result in 100,000 solar energy installations per year in California, Tesla's solar roof will see a dramatically larger market than it can even stand for. Tesla boasts that Solar Roof will be cheaper than the total cost of a traditional roof with solar panels. This particular point makes Solar Roof very appealing to Californians who build their new homes because they need both a roof and a solar system. It does not seem that a customer who does not need a new roof will consider this product unless they are wealthy to do so, as this will make Solar Roof significantly more expensive than just solar alone. With over five million new roofs constructed in the United States each year, Tesla is likely to capture a meaningful portion of those who want solar power. Even just 1% of this market is likely to be more than Tesla will ever be able to account for, giving them strong demand to last. In addition, the product has already strongly demonstrated interest, proving the marketability of the product and the ideas expressed in this section. With all these new roofs every year, Tesla's Solar Roof will probably be the foremost candidate for people to choose with the sleek look and affordability of demand to outperform production.

Tesla's traditional solar panels will not suffer as a result of Solar Roof's strong demand. In fact, they too will get an increase. The rapidly growing market in California will certainly not hurt, but the introduction of a new solar system pricing system, a subscription service, as Tesla puts it, for as little as $ 50 per month without any long-term contract, is likely to help. Tesla's own solar offering offers more appeal to a wider audience. Tesla claims that this product will generate net positive cash for the owner based on reduced electric bills and the ability to sell electricity back to the grid. Through this offer, Tesla technically owns the solar panels, but all the electricity produced by the panels goes directly to the home they are installed on. Owners can cancel the contract at any time and can choose to either put the sleeping panels on the roof or have them removed for $ 1,500. This removal fee allows Tesla to avoid real system losses, as they can then resell the devices. 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 results in a dramatic fall in price. Tesla reduced the price of these systems to be noticeably lower than the national average, as low as $ 1.75 per kWh as opposed to the national average of $ 2.09 per kWh. With these low prices and fast installations, Tesla improves their product offerings, especially when compared to competitors. The subscription service that Tesla offers for its solar panels is likely to be an incredibly strong product offering with high demand as there is nothing else on the market and provides a very attractive financial alternative for most customers. Some may choose to buy the panels in advance as well, as they prefer to own the panels themselves, Tesla should also see strong demand for their traditional solar panels. An initiative by Tesla to install solar panels 24 hours after ordering is also likely to increase demand as customers want to receive their panels and get them installed as soon as possible. Unlike the solar roof, however, the panels have uses beyond the solar cell's housing. With the rapidly growing solar market, which is expected to reach $ 22.9 billion by 2025, Tesla will be able to maintain high demand for its traditional solar panels through major commercial and potential utility projects.

Source: Engadget

To ensure strong demand, for all their energy projects, Musk has said that they will begin selling their solar products in Europe. Tesla already offers Powerwall in Europe, although they have their huge backlog in America to work through, which will now be able to connect with Tesla solar if the customer so wishes. Even if they don't, Tesla should see a huge market for its solar products in Europe. Europe has a fairly large solar cell market, even bigger than the US, with 11 GW solar panels installed in 2018. On top of the US 10.6 GW solar installed in 2018, Tesla would need to capture only 4.6% of both markets to sell all their solar products, even before the market grows. In the United States, solar plants are expected to reach 15 GW per year by 2024, and Europe is likely to see similar growth. So while Tesla should see sufficient demand in America for its solar products, the addition of Europe to the customer base will guarantee an incredibly large market.

Financial Impact

Tesla's solar panels cost $ 2,636.05 per kW (author's calculations using Tesla's sales information) while Solar Roof currently costs $ 6,839.58 per kW, though Musk claims they can get it even more down. For the purposes of this analysis, I will use a cost of $ 6,839.58 per kW, which is proven and is therefore more reliable and likely. The target margin for their traditional solar panel is probably around 20%, above the industry standard of 15.2% (based on recent quarterly reports from JinkoSolar (NYSE: JKS), JA Solar (now private) and Trina Solar (now private)), which are also standard for Tesla's other products. The sunroof is likely to have a margin of around 25%. Tesla has been targeting this margin for its cars for several years, and as this product is more expensive and specialized, it is likely to have a slightly higher margin than most premium products. Like the Model S and Model X, it is a lower production product with a higher margin. In addition, 25% is just slightly higher than the 20% margin of standard solar power, making this a possible margin to maintain. I also expect that Tesla's subscription service will capture ~ 25% of its solar panel customers, boosted by competitive pricing offered by the system, but limited by the disadvantage of not owning the system. Using the above production ramp, margins (assuming margins tend to be lower toward the beginning of a production ramp), and financial alternatives, Tesla will generate a gross profit of $ 350 million in 2020, $ 491 million in 2021, $ 470 million in 2022, and $ 406 million in 2023 and beyond of their solar products (the pre-solar charge for Tesla was deducted from estimates while monthly; subscription payments were included at $ 13,177 per month per kW [author calculations with Tesla sales information]). The reason these numbers are shrinking, even as total production increases, is that even with only 25%, subscription solar costs more than Tesla's other traditional panels make. So when it captures Solar Roof production, Tesla can withstand its own profit margins.

Tesla's solar subscription service will take slightly less than 18 years to equal the cost of purchasing solar panels in advance, which means these gains will take a while to actually manifest, reducing the initial profits dramatically. Tesla owns $ 6.2 billion of solar panels left over from SolarCity's own leasing days, and will now continue to add this number through the subscription service. Tesla also took on $ 3.25 billion of SolarCity's debt, bringing the total cost of this acquisition to $ 5.85 billion. So the products designed under the SolarCity brand, with Tesla, will be able to cover the cost of procurement in a timely manner – just over 14 years .

Controversy and Risk

There has recently been a resurgence of controversy surrounding the acquisition of SolarCity. At the time, Tesla used Solar Roof as a way to justify its acquisition, but it's been three years, and we still don't see the product being mass-produced. In addition, Tesla, an already financially distressed company, was forced to pay $ 2.6 billion to acquire SolarCity and take on $ 3.25 billion in debt. This was the real kicker. The company was going through, but Tesla was still pushing for the merger to happen anyway. To this day, I believe that Tesla will forever be inferior to this acquisition and should not have happened. After all, most of the products I have discussed above do not depend on SolarCity at all, and even Solar Roof could probably have happened without SolarCity. The PV cells themselves are made by Panasonic, and Solar Roof is Tesla-made tech. The early announcement of Solar Roof is also a direct result of this acquisition, which has caused high levels of criticism for the company. Essentially, I agree with outrage from investors, but I also don't think anything will come out of the lawsuit. The reason I believe this is because Musk is likely to be able to hide behind the technology by itself not to vote on the acquisition and overwhelming support from Tesla shareholders at the time of acquisition. So while this lawsuit against Musk and Tesla is likely to be lost, anger around this acquisition is certainly justified.

Another important point that lies at the root of the variable interest rate obligations ("VIE") that Tesla took on when acquiring SolarCity, a problem I will give a brief summary of myself. Tesla took on $ 1.899 billion in VIE liabilities, and these credits are often taken out of Tesla's operating cash flow. This makes profitability increasingly difficult for Tesla to achieve and has therefore damaged Tesla's business as their profitability is often at the forefront of investors' minds. So on top of SolarCity's debt, Tesla was now forced to take on these VIE commitments that hurt its profitability and overall profit margins.

Tesla's controversy does not end with the acquisition of SolarCity. Tesla's second Gigafactory, located in Buffalo New York, is responsible for the production of Tesla's solar products, but more importantly, Gigafactory 2 is responsible for 1,460 jobs by the end of April 2020. If Tesla fails to meet this, they will be charged 41, $ 2 million for every year they do not meet this requirement. All this happened because Tesla was given $ 750 million to help subsidize the construction of the plant, as long as they promised to meet certain employment numbers, the first of which met in April this year. If Tesla is truly able to ramp up production as they expect, it seems likely that the company will be able to meet this workforce demand, and Governor Andrew Cuomo has also stated "It's his confidence that matters – and our contract protection. A contract is a contract. " It will probably be cheaper for Tesla to face the cost of hiring unnecessary employees than to hit $ 41.2 million for failing to comply with the contract. Even so, Tesla probably does not want useless workers at the factory to force them to ramp up production of the product to become more efficient. So even if Tesla fails to increase production, they will not be hit by this penalty because it financially does not make sense for them to avoid hiring these employees.

Beyond the controversy is the risk associated with this task. Two of the largest are the lack of distribution infrastructure and the cost of fronting these solar panels, the latter being the cause of SolarCity's financial distress. Tesla is already in financial distress and probably can't afford to put on more debt, on top of current debt of $ 11.366 billion. With $ 5 billion in cash and cash equivalents, the highest level in Tesla's history, they have a relatively strong liquidity right now that can cover the costs of this business a little, but this is probably not sustainable for the company. In the long term, this fronting business will be profitable for Tesla, but they simply cannot afford to wait 18 years for a break-even, given their current financial condition. At peak operation, if Tesla fronted the cost of each solar panel, it would cost them $ 1.451 billion per year (author estimates that use previously disclosed information). Although not all of their liquidity, it is a pretty meaningful part that is used to not be seen for another 18 years. Although there will still be a large portion of Tesla's customers who purchase the panels in advance, Tesla will have to close this business before it becomes too much of a burden to the economy, probably within a year. However, I have left the analysis as it is, with much weaker numbers, due to the possibility of Tesla choosing to maintain this, initially unprofitable, business. If Tesla were to close this business after 2021, they would see a gross profit of $ 1.167 billion by 2022 and a gross profit of $ 1.423 billion by 2023. These significantly higher profits demonstrate the greater success Tesla would see if they dropped their subscription service , but it appears that they currently want to prioritize growth over profits in the solar energy sector.

Falling sales is not much of a problem, although some may point to it as a lack of demand. This is not the case, as I have discussed in the article, the demand for Tesla solar products remains quite high, and the reason why Tesla began dropping solar installations is as simple as the lack of supply and focus. When she brought her Model 3 sedan to market, Tesla was focused on vehicle production and success and not as focused on solar energy. As a result, production problems were not solved and therefore Tesla lacked the supply of panels to retrofit home with. Letting go of retrofitting solar power was certainly a symptom of a problem with Tesla, although it was a logistical and production problem, not a demand problem. The logistical problem seems to be in the process of the previously mentioned 24-hour installation and the new luminaires designed to make installations even faster. These faster installations not only allow higher margins and demand due to reduced construction work, but it also allows Tesla to complete more installations since they can work through the lag much faster without having to worry about hiring many new employees to account for higher demand.

Last, but certainly not least, Tesla faces a lawsuit from Walmart (NYSE: WMT) for faulty solar panels that caused multiple fires. Firstly, I want to make it clear that solar panels should not catch fire, and that it is very rare that such an event occurs. The records of what happened between Tesla and Walmart, reported by Reuters, show that even though this problem began before Tesla purchased SolarCity, Tesla itself, after the acquisition, failed several times to remedy the problems caused by the panels. In all honesty, Tesla should not win this lawsuit as it seems that they were given more chances to remedy the problem and failed every time. Although it appears that Tesla has improved installation and inspection methods since the fires, they should still be held accountable for their past mistakes. This suit is likely to force Tesla to cover the costs of the systems themselves, although I do not believe this suit indicates Tesla's current practice. While Tesla was probably wrong here, I think they won't have any fire problems in the future.

Disclosure: I am / we are a long time TSLA. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.



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