Tesla’s storage growth not enough to appease Wall Street

Tesla’s Q2 results have drawn ire from the Wall Street community, but while its automotive endeavors have been the main focus, it reported strong growth in its battery storage installations – a sign that it might have finally got back on track following the SolarCity debacle.

In 2018, Tesla decided to use all the available 1-cell output from its Gigafactory to supply its Model 3 cars, diverting them from storage. Despite this, 2018 accounted for 1,040 MWh of storage installations, compared to 358 MWh in 2017. Tesla is aiming to deploy over 2 GWh of storage in 2019.

It seems like it could well be on track to do so. Q1 was a slow start, at just 229 MWh, but now that it is clear of the Model 3 supply chain constraint, the growth it achieved in one quarter indicates that it has turned a corner. Powerwall and Powerpack installations were up 81% in the quarter, hitting 415 MWh in Q2, with over 50,000 locations.

Tesla’s solar and storage business generated $368.2mn in quarterly revenue, up from $324.6mn in Q1 – up around 13%. However, Q2 2018 revenue was $374.4mn, meaning that Tesla is down 2% here year-on-year. This is indicative of the toll that Model 3 production took.

Some in Wall Street note that it is unclear if this quarterly growth is driven more by the availability of batteries, fulfilling an extensive backorder, or if there is new strong demand for the products. Tesla has remained quiet on that point, but said the gross margin in the energy generation and storage business has improved to 12% in Q2, from 2.4% in Q1.

The new Megapack utility-scale battery offering was floated in the results announcement – A 250 MW (1 GWh) unit that can be deployed in less than three months on a three-acre footprint that Tesla reckons is about four times quicker than an equivalent fossil-fuel option.

However, a $62mn impairment on unspecified R&D projects was notable, given that the Solar Roof is yet to become a mass-market offering. Tesla confirmed that these impairments concern SolarCity projects, but doesn’t go as far as saying which ones.

Tesla also reported a $48.8mn loss for closing facilities and $6.2mn in employee termination expenses. It says that the restructuring should save $130mn for the second half of 2019 – which gets most of the way to making up for the $167mn loss it reported in Q2, on revenues of $6.3bn.

CEO Musk said that Tesla was unlikely to post a profit in Q3, and also had to announce that founder and CTO JB Straubel was stepping down and taking an advisory role at the company. VP Engineering Drew Baglino is taking over at CTO, and there are reports that Straubel’s presence at Tesla HQ had been “scarce” over the past six months. Straubel has been at Tesla longer than Musk, and it seems likely that he is going to be more focused on his new materials recycling startup.

Much of the reaction to the overall results have focused on the lower-than-expected automotive gross margin of 18.9% and the posted loss, but that margin is quite large compared to most automakers, where single-digit margins are common – although Tesla is admittedly not chasing low-cost cars.

As for its automotive progress, Q2 was a record for production and deliveries, but is only a little higher than Q4 2018. The new FSD computer is apparently 21x faster than the HW2.5 model, and the Enhanced Summon feature is being shadow-tested in the fleet. Tesla is about to launch Model 3 production in China, and says it is on track to open its new Shanghai Gigafactory by the end of the year too.

This new production capacity could propel Tesla’s storage business much further in 2020, although it is initially being used for the Model 3 project in China. The decision on the location of the European Gigafactory is also imminent, according to the filing.

Tesla has also essentially confirmed that it will be making its own battery cells, following its acquisition of Maxwell. On the call, Tesla leadership discussed plans to ramp battery production to the TW-per-year level, but the full details of that strategy are going to be announced properly in 2020. The Panasonic partnership with Tesla in the Nevada Gigafactory constitutes 28 GWh per year (up from 23 GWh last year), meaning that this ramp would be colossal – exactly the kind of announcement that Tesla likes to make, to distract from bad news in the results, as many cynics will argue.