Professor Aswath Damodaran (https://www.linkedin.com/in/aswathdamodaran/)
has said in his many valuations of Tesla over the last decade: “I know that Tesla does and can sell more than just cars (energy solutions and software), but these are businesses that, at best, can add tens of billions of dollars to the mix, not hundreds” In this he is wrong. By far. By a country terawatt hour.
No-one does company valuation analysis better than Aswath Domodaran. Both modest and learned, he presents valuations with great clarity, providing detailed spreadsheets that allow readers to plug in their own assumptions. His latest Tesla Valuation:
I was turned on to Aswath Domodaran by James Stephenson (Twitter: @ICannot_Enough). He did an excellent video critiquing this latest valuation, pointing out that Professor Damodaran omitted, inter alia, the Tesla energy business from his analysis. The video can be found at
My intention here is not to criticize Professor Damodaran, but to provide specific emerging facts that may gain his attention and encourage him to review them.
(Many may disagree with the ultimate share of auto market that Tesla will attain, and this will impact the valuation materially. Domodaran allows for this, and the spreadsheets may be appropriately adjusted by those who differ.)
Rather, it is in the dismissal of the Energy market that I, along with James Stephenson, believe Damodaran makes a significant error, assigning to the sidelines a business that will rival the auto business in growth, size and potenitally profitability for Tesla.
Damodaran notes, in his January ’23 update “I know that Tesla does and can sell more than just cars (energy solutions and software), but these are businesses that, at best, can add tens of billions of dollars to the mix, not hundreds.”
In fact, evidence is emerging of a huge market for Tesla industrial and commercial energy storage products. The universal move to renewables in the energy markets is going to need batteries (and a LOT of them) and – even more importantly – software, engineering & productization to implement electrical storage at global scale.
In 2017 Tesla installed what was at that time the world’s largest lithium-ion battery, and the first to exceed the magical 100MWh scale, the 129 MWh Hornsdale battery. This catalyzed a new industry in grid scale battery storage, opening the floodgates.
In 2019, Sam Korus of Ark Invest argued that that large scale battery storage costs were declining to the point where they would outcompete Natural Gas Peaker Plants, and this would “be…an $800 billion opportunity globally.”
However, the real opportunity in energy storage may lie far beyond the replacement of underutilized gas plants – the role, according to Dr. Jeff Dahn stretch to being the back-up to wind and solar energy as these replace ALL fossil fuel power generation sources.
There are few that are as versed in battery and energy technology as Dr. Dahn, Professor in the Department of Physics & Atmospheric Science and the Department of Chemistry at Dalhousie University one of the pioneers of the lithium-ion battery.
Dr. Dahn says that the world will need a fleet of 400 Terawatt Hours of batteries deployed to truly move to sustainable energy. If we assume that the technology gets us to a 50-year battery lifetime, that is a steady state market of 8 TWh, or $4T per year at current prices. This exceeds the size of the Auto market.
Whether you accept Sam Korus’ (now) modest analysis or Jeff Dahn’s more aggressive projections, there is a very, very large market for these giant batteries. Relative costs appear to have declined even more rapidly than Korus’s model, potentially enlarging the market sooner than Korus projected.
Globally the current industrial storage sites in operation, under and awaiting construction, is around 180 projects totaling 146 MWh, 85% of which is in backlog. At historically contracted prices of about $500k per MWh installed with peripheral equipment, this is a backlog of nearly $75b.
Tesla has demonstrated both the size of this market, it’s growth rate, and the current and potential profitability. To date, Tesla have implemented projects totaling more than 10GWh, of which more than 5GWh was delivered in 2022, and 2.5GWh of that in Q4 alone.
The metamorphosis in Q4 was because, within a year of the announcement, Tesla commissioned an industrial modular battery factory to automate and increase the production of its Megapack range of products. It is currently said to be producing at the rate of 12 Megapacks per day, an annual run rate of nearly $5b, and likely to reach its rated production capacity of 40 MWh, or $20b p.a., within this year.
Most recently Tesla announced the expansion of the Gigafactory in Nevada, adding 35GWh of battery cell capacity; this factory also manufactures Megapacks, but the capacity is unknown. Whatever the total capacity of Megapack production, Tesla’s website indicates that Megapacks are sold out for two years.
Tesla is aggressively evolving its battery technology and manufacturing capabilities, to extend its lead in this very rapidly growing market, which has been driven into overdrive by the Inflation Reduction Act of 2022 (IRA). Whatever the Tesla and industry backlog was at the end of last year, this is just the beginning. By way of emphasis, on the date of this writing, Tesla signed agreements for a 1,000 MWh Tesla Megapack system in Southern Ontario. At current market prices, such a project alone exceeds half a billion dollars.
But Lathrop and the new agreements are already being reflected in the Tesla financials. Zach Kirkhorn, at the recent Q4 2022 earning call, said:
“The energy business had its strongest year yet across all metrics, led by steady improvement in both retail and commercial storage. While much work remains to grow this business and improve costs, we believe we are on a good trajectory. As we look toward 2023, we are moving forward aggressively leveraging our strength and cost.”
“…. And so, as other areas of the business become more important, particularly the energy business, which is growing faster than the vehicle business, and as we’re heavily focused on operating leverage here, improving efficiency of our overheads, we think the right metric for us to be focused on is operating margin. And so, I wanted to make sure that I shared that with the investor community as well because that is what we’re primarily managing to now.”
In addition, we had this interchange:
Martin Viecha – Head of Investor Relations at Tesla
“And the last investor question is, with near-infinite global demand for energy storage, where should Tesla build the next Megapack factories? How many are needed on each continent?”
Elon Musk — Chief Executive Officer and Product Architect:
“It’s a good question. It’s not something we — I think we’ll provide an update about that in the future, but it is something we’re thinking about very carefully. But really kind of like what is the fastest path to 1,000 gigawatt-hours a year of production. And you’ll see announcements come out later this year and next that answer that question”
1,000 GWh, at current Megapack prices, is about $500b in revenue, which aligns with our math. It also aligns with the total scale of Tesla’s ambitions, measured by the Tesla Battery Day target: 3 TWh of battery cells in total supply by 2030 from a combination of its own factories, new, and existing suppliers, of which a significant proportion of cells will be dedicated to Tesla energy.
And, of course, a business of this scope utterly changes the valuation of Tesla.
To properly value the impact of a significant energy storage business on the Tesla valuation, we need to look at where Tesla’s energy business has been. To date margins in the Energy business have been – well – marginal. This changed dramatically in the recent 3 quarters as old, fixed price contracts gave way to new, supply-chain indexed contracts and Lathrop spooled up. Growth rates in 2022 averaged above 10% per Quarter, while margins shot up from the first to the second quarter. In the past margins have been negative to barely positive, but for the past three quarters have hovered around the 10% mark. These margins are impacted by the remnants of the old, fixed price energy storage contracts, plus the retail solar business which is still ramping and is probably operating at a negative gross margin. Our assumption is that the operating margin on the storage business is quite significantly north of 15%.
This graph tells the tale.
We see an emerging pattern, not dissimilar to what happened when the Tesla auto business began scaling to the mass market. With Lathrop reaching full productions, and Giga Nevada’s announced expansion, the breadth of Tesla’s energy storage enterprise has become clear, supporting Zach Kirkhorn’s guidance. With their announced ambition of a 3 TWh total battery cell supply by 2030, Tesla are aiming at, and scaling to an industrial energy storage business of many hundreds of billions of dollars.
We believe that Professor it is now time for the good Professor to address the potential of the energy business. Wether we rely on the Korus or the Dahn scenario, and based on current growth, backlogs, and the US Federal Government’s focus on ending US reliance on Fossil Fuels, this is a giant growth area in which Tesla is already a – if not the – leader.
How do we believe this should this affect the valuation? The most important factor is alluded to by Kirkhorn: “we’re heavily focused on operating leverage here, improving efficiency of our overheads, we think the right metric for us to be focused on is operating margin” Functionally, the gross margin on Tesla’s Energy Storage business will fall almost directly to the bottom line. At a guess, it would seem to me that the energy business would almost double the value of Tesla.
Professor Damodaran please pay attention!