Tesla Motors Inc.’s (TSLA, Financial) plans to enter the energy storage segment by launching wall mounted batteries for the home, business and utilities generated an interest in the stock post announcement, and the price was up by 8%, closing at $226.05 on April 30. The share price after initial movement was down and so were the volumes after market hours.
Essentially a player in the electric vehicles, advanced electric vehicle powertrain components and stationary energy storage systems, Tesla has grand plans in the energy storage or batteries business.Â
Christened ‘Powerwall”, the range of rechargeable lithium-ion batteries will be in 7 kilowatt-hour and 10 kilowatt-hour versions and the price would begin from $3,000. Deliveries will begin in summer. The company’s rationale behind the product is increasing demand and use of renewable energy, both solar and wind. As the demand for power grows, these batteries can be used to store electricity during peak production, if they are recharged during non-peak usage hours when electricity prices are lower. Tesla is setting up a mega production plant at Reno, Nevada with a CAPEX of $5 billion that will cater to both car and energy storage battery market.
Will the gambit pay-off?
Mounting losses from the vehicle business may have prompted Tesla to open a new revenue stream of energy-storage batteries, an aligned business where it has competency. There is no doubt about the fact that with the power industry struggling to meet growing consumer demand from homes and businesses, the storage segment of the utility industry may be maturing sooner than later.
However Tesla faces several challenges before the road to sustained profitability riding on a new product segment is finally reached.
As the initial indication of price suggest, the product may be more geared towards the businesses rather than residential as the pricing is stiff. Further, lithium batteries are nothing new for anybody to pay more, the cost-benefit ratio is diminishing. In that sense, the company does not have an innovative product on hand to give it the first mover’s advantage.
The storage industry is extremely competitive and there are dozens out there from established players like Siemens (SIEGY, Financial), Mitsuibishi and Johnson Controls (JCI, Financial) to smaller players and start-ups who want to cash on the growing demand. There is Enphase Energy (ENPH, Financial), Sunverge, Alevo and NEC Energy Solutions. Amongst all these competitors, how Tesla positions its brand will be keenly watched and what differentiation it offers to its buyers will matter.
If the company just addresses the commoditised battery market and is unable to do anything innovative in terms of technology, price and branding then the incremental value to the consumers and to itself in terms of revenue growth and in wiping off losses will be far less.
Conclusion
To sum up, investors will be closely observing how the new product contributes to company’s financials and the effect of the same on stock prices. As of now, for the year ended March 2014, rising revenues to $ 3.20 billion from $ 2 billion in March 2013 has failed to stem loss from $ 74 million in 2013 to $ 294 million in 2014. Net cash flow remains negative at $ 465 million.
It remains to be see whether ‘PowerWall’ will help Tesla Motors turnaround.
