Elon Musk just proved my pet theory about Tesla Motors (NASDAQ: TSLA). By acquiring Solar City (NASDAQ: SCTY), the billionaire is demonstrating that Tesla is an energy company; and not an automaker.
The evidence that Tesla is really an energy company has been before our eyes for a long time; even though a lot of people have refused to see it. The Solar City purchase is only the latest piece of evidence; and it too will be ignored.
Some Reasons Why Tesla is an Energy Company
The case that Tesla is really an energy company was actually very easy to make before Solar City. Here is some proof that Tesla is really an Energy company:
- Tesla’s highest profile project is the $5 billion Gigafactory 1 in Nevada. The 5.5 to 5.8 million square foot factory produces battery not automobiles.
- The first production at the Gigafactory in May 2015, was Tesla Energy’s Powerwall home electricity storage systems; and commercial batteries not power units for Tesla cars. When Bloomberg reporters visited the factory they found those items under production not car battery packs.
- There are five areas of business listed at Tesla’s website; Model S, Model X, Model 3, Charging, and Tesla Energy.
- The Tesla Energy section of the website contains this language: “Tesla is not just an automotive company, it’s an energy innovation company. Tesla Energy is a critical step in this mission to enable zero emission power generation.”
- Musk himself has admitted that Tesla is in the filling station business. During Tesla’s 2016 shareholders’ meeting on May 31, Musk announced that the company will probably charge owners of its Model 3 Sedan to use the superchargers. He admitted that the superchargers are filling stations.
- A picture of a Supercharger at the Tesla website shows, one of the facilities outside a building that looks suspiciously like a Whole Foods supermarket.
The evidence that Tesla is really an energy company is right before is we care to look. Purchasing Solar City is simply the next logical step, because it gives Tesla a source of electricity. Such an electricity source is necessary because the electric grid is no longer reliable.
Grid Failures create a Market for Tesla Energy
Converting Tesla into an energy company makes a lot of sense because there is a growing market for backup electricity, especially in the United States. Recent news stories show that America’s electric grid is no longer a reliable source of power in many areas.
Southern California residents can expect as many 14 days of rolling blackouts if temperatures get too high this summer, the California Public Utilities Commission (PUC) warned in April. The region is facing potential electricity sources because the Southern California Gas Company’s Aliso Canyon natural gas-storage facility is offline.
That means there simply is not enough natural gas to run the region’s power plants on hot days when the air conditioning is cranked up. On June 20, 2016, Los Angeles area utilities were urging customers not to run washing machines and dishwashers until after dark to conserve power. Businesses were also ordered to curtail operations because of potential shortages.
Around 10,000 to 20,000 Southern California Edison customers did lose power during triple digit temperatures on June 20, The Los Angeles Times reported. Power outages were only avoided because Los Angeles Power and Light switched some of its plants to burning diesel fuel instead of natural gas.
This creates more demand for both Solar City’s solar electric systems and Tesla’s storage batteries. The PUC gave Southern California Edison permission to purchase battery storage to avoid future blackouts in May, The LA Times reported.
Electricity shortages might be head in other parts of the country. Wisconsin’s supply of electricity is expected substantially by 2021, The Chippewa Herald reported. Several Midwestern states face potential electricity shortages because of the closure of nuclear and coal-burning plants in the region, the Midcontinent Independent System Operator concluded.
Does Solar City Make Money
Despite the market potential Solar City is not making any money. The company reported a net income of -$61.79 million, a profit margin of -20.99%, and a free cash flow of -$652.76 million on March 31, 2016.
To make matters worse Solar City also lost -$811.72 million in cash from operations. That of course raises the question why would Musk buy it. My guess is because Solar City is very cheap right now. It had a market capitalization of $2.264 billion and an enterprise value of $5.374 billion on June 22, 2016.
Musk wants Solar City because a manufacturer of solar panels is needed to implement his plan to transform Tesla into a full-service energy company. Such an energy company is needed to implement his long-term scheme of having electricity replace fossil fuels.
That may not work but it is certainly a noble idea and it is fun to watch. One more thing, investors need to learn a lesson from the Simpsons’ Mister Burns here. Elon Musk is not about making money, he’s about transforming the world. That means the goal of Tesla Motors is to produce a paradigm shift in energy; not to build a new generation of automobiles.