Tesla’s energy segment is gaining attention from analysts as a significant contributor to the company’s valuation. While the electric vehicle business remains Tesla’s primary focus, the energy division is showing promising growth and potential, according to a recent MarketWatch report.

The Underappreciated Energy Segment

Baird Equity Research analyst Ben Kallo highlighted the importance of Tesla’s energy segment in a note released on Thursday.

He stated, “Rapid growth in deployments and gross margins exceeding those of the Automotive business have begun shifting attention to this component of the company and raised the question of the Energy segment’s contribution to TSLA’s valuation.”

Kallo estimates that the energy segment contributes approximately $41 per share to Tesla’s combined valuation, describing it as “one of the most under the radar aspects of the broader business.”

Key Components of Tesla’s Energy Business

The analyst firm emphasized two main elements of Tesla’s energy segment:

Powerwall residential and commercial battery
“Utility-scale” Megapack

These products are part of Tesla’s strategy to expand beyond electric vehicles and into the renewable energy sector.

Market Outlook for Renewable Technologies

Despite challenges in the renewable energy market, Kallo remains optimistic about Tesla’s position. He noted, “Utility-scale has been viewed by many in the space as one of the brightest spots for renewables in recent past, and we agree. The headwinds of higher interest rates and high upfront costs for many renewable technologies have been more easily absorbed by large developers than individuals.”

Tesla’s Energy Segment Performance

Tesla’s energy division is showing impressive growth:

Q2 2024 energy generation and storage revenue: $3.014 billion
Q2 2023 energy generation and storage revenue: $1.509 billion

This significant year-over-year increase demonstrates the segment’s rapid expansion, even as the automotive revenue experienced a slight decline.

Analyst Projections and Market Sentiment

Baird’s projections for Tesla’s energy business through 2029 include:

~25% gross margins
~12% EBIT margins

However, the firm acknowledges that its volume estimates may be conservative. “TSLA’s Megapack factory in Lathrop, CA is expected to reach annual production capacity of 40 GWh by year-end 2024 with the Shanghai factory ramping in 2025,” Kallo wrote.

Of 56 analysts surveyed by FactSet:

22 have an overweight or buy rating
22 have a hold rating
12 have an underweight or sell rating for Tesla

EVXL’s Take

While Tesla’s electric vehicle business continues to dominate headlines, the company’s energy segment represents a significant opportunity for diversification and growth. As the world increasingly shifts towards renewable energy solutions, Tesla’s Powerwall and Megapack products position the company to capitalize on this trend.

The energy segment’s rapid revenue growth and potential for high margins suggest that it could become a major contributor to Tesla’s overall valuation in the coming years. This diversification may help Tesla weather fluctuations in the automotive market and establish itself as a comprehensive clean energy company.

As the renewable energy sector continues to evolve, Tesla’s energy division could play a crucial role in advancing sustainable power solutions and supporting the global transition to cleaner energy sources.