Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Musk Aims to Disrupt the Electricity Market

Elon Musk is out to change the way people power their homes and to completely disrupt the electricity and utility businesses. He has also transformed his automaker, Tesla Motors (NASDAQ: TSLA), into an energy company in the process.

Tesla’s newest product is the Powerwall, a giant battery that can hold enough electricity to power a home for a few days. It’ll be made from the same lithium batteries that power Tesla’s cars.

The Powerwall is one of the most disruptive products yet because it could allow average people to practically disconnect from the grid. A person could rely on it, a natural gas powered fuel cell or solar panels and basically tell the power company to go to hell.

The Tesla Power Wall
The Tesla Power Wall

One advantage to the Powerwall is that its software will enable homeowners to buy electricity at times when it is cheaper, such as night, and store it until they need it. It’ll also allow people that use the solar panels from Musk’s other company, SolarCity (NASDAQ: SCTY), to store the power they get from the sun.

The current cost of the Powerwall is around $18,000, but the price could fall to $3,000 to $5,000 once the Gigafactory goes into production in 2017. The Gigafacotry is Musk’s giant battery factory in Northern Nevada.

My prediction is that there will be a lot of demand for the Powerwall. The biggest demand will come from small business people and people that work at home. Many of them, like me, need reliable power in order to keep the computer running and the money coming in. Others need electricity to run things like machine tools for home workshops.

Another big area of demand will be from persons with health problems that rely upon respirators and other devices to keep themselves alive. They cannot afford to run the risk of the power going off.

The Powerwall Will Give Tesla Float

Leasing the Powerwall to home and business owners could help Tesla by giving it float. SolarCity already generates a lot of float by leasing solar electric systems to customers; the Powerwall could do the same for Tesla.

If Musk could lease out several million power walls, Tesla could be sitting on a lot of float. SolarCity’s established network of installers could be used to install and service the Powerwalls. It could also serve as the organization that leases the Powerwalls.

If it works as advertised, the Powerwall could be a cash cow that generates a lot of float for Tesla. Float, for those who do not understand it, is a stream of cash that a company can tap for any reason. Value investors know that Warren Buffett loves float and looks for companies with a lot of it.

Float is one thing that Tesla could use at this time. The automaker reported a free cash flow of -$455.06 million on Dec. 31, 2014. As the chart shows, Tesla’s free cash flow has been free fall of late; it fell from $44.55 million in December 2013 to -$455.06 million on Dec. 31, 2014.


SolarCity could also use float at this time as well; it reported a free cash flow of -$514.42 million on Dec. 31, 2014. That’s more than double what it was on Dec. 31, 2013, when it was -$220.98 million.

Both Tesla and SolarCity are losing a lot of money, and both could be in serious trouble if Mr. Musk cannot figure out a way to start generate cash and a lot of it—and fast. Musk has taken a very bold gamble here; he’s essentially betting two of his companies on a fundamental shift in the way the world gets electricity. If that change does not occur, both Tesla and SolarCity will find themselves caught in the death spiral.

If the change occurs, however, Elon Musk could become the richest man in the world. He might even generate enough money to pay for his Mars colony with all the float the Powerwall might deliver. One thing is certain however: Tesla is one stock that investors should stay away from for now—far, far away.