There were already signs that all was not well at Tesla's (TSLA 11.00%) SolarCity subsidiary, way back in early 2017. In the first quarter after Elon Musk closed on the automaker's purchase of the solar installer, the company reported a number of problems, including shrinking cash flows, lower-than-expected gross margin, and the need for cost-cutting.
A number of developments since then have brought the solar installer closer and closer to oblivion. But the March 1 announcement that the company will close most of its stores may be the final nail in SolarCity's coffin. Here's why, and why it may not matter much for Tesla or its investors.
Check out the latest earnings call transcript for Tesla.
A bright sunshiny day
Just five short years ago, in 2014, SolarCity -- then a separate company -- was the top solar installer in the country. Its unique business model involved installing a solar system on a home for free, but retaining the system's ownership and selling the electricity it produced to the homeowner at a much lower rate than the local utility. This freed the homeowner from the massive up-front costs of a solar installation, and allowed SolarCity to have a growing recurring revenue stream.
However, the price of solar panels and solar systems rapidly began to get cheaper, which didn't do SolarCity's sales model any favors. In early 2017, SolarCity -- now acquired by Tesla for $2.9 billion in stock and the assumption of $2 billion of SolarCity's debt -- stopped selling solar panels door-to-door, and that same year lost its top installer crown to Sunrun.
Tesla tried a number of things to boost sales, most notably partnering with Home Depot in February 2018 to sell SolarCity products in kiosks in about 800 of Home Depot's roughly 2,200 stores. Musk pulled the plug on that collaboration in June 2018, just four months after it launched, which was odd because Home Depot reportedly accounted for about half of SolarCity sales.
Musk explained that he wanted to "focus ... on selling solar power in Tesla stores and online." But clearly, that's no longer the plan.
An abrupt about-face
In the company's Q4 2018 update letter -- which was released on Jan. 30 of this year -- Musk was still clearly envisioning Tesla stores as the primary sales venue for the company's solar products. "We are still in the process of transitioning our sales channel from former partners [read: Home Depot] to our Tesla stores and training our sales team to sell solar systems in addition to vehicles," he wrote.
But then, just over a month later, Musk announced the company would close most of those stores -- and, presumably, lay off most of that "sales team" -- in order to offer the long-awaited $35,000 version of the Model 3. According to Musk, offering sales only online and by phone would shave 6% off the cost of each vehicle -- and that's not chump change.
That would leave Tesla's website as the lone source for solar installation sales. Right now, the only sales opportunity on the site is a "Request a Custom Quote" button on the energy page that takes you to a half-page form collecting name and contact info. "Don't call us; we'll call you" has never been a particularly strong sales technique. Now, it's possible that this feature will become more robust once the Tesla stores close and the company ramps up online sales in general, but I'm not holding my breath.
Why it may not matter
First of all, the name "SolarCity" is, for all intents and purposes, already dead. It doesn't appear anywhere on Tesla's website, except in archived press releases and reports. The company's solar panel and solar roof installations, as well as its PowerWall and PowerPack energy storage units, are listed in financial statements as "Energy Generation and Storage," and on the website as just "Energy."
Surprisingly, Tesla's energy sales have actually been growing like gangbusters. Revenue grew at an impressive 39.3% in 2018, to $1.6 billion, and gross margin was up 604 basis points year over year to a decent 11.7% in Q4. Of course, that's a pittance compared to the company's $18.5 billion in 2018 automotive revenue, and automotive's 24.3% gross margin, but it's still solid growth.
The big reason these numbers are so positive is thanks to "a substantial growth in energy storage deployments," according to Tesla's Q4 2018 update. Meaning it's the energy storage part of the business -- as opposed to the generation part -- that's powering its growth. Indeed, in the letter, the listed primary growth opportunities were for PowerWall energy storage in Australia and Europe, and large-scale battery projects across the globe. Tesla doesn't break out its energy sales by product, but it seems a sure bet that they're declining...and probably rapidly.
What it all means
Tesla's primary focus is -- and should be -- manufacturing cars. Its automotive division is responsible for 86.3% of company revenue, while energy only contributes 7.2% (the rest is "services and other"). It's unclear how much of that 7.2% comes from solar panel installation, but the primary growth segment for Tesla Energy is energy storage, not solar generation.
So even though the main avenue for solar system sales is about to be cut off, neither investors nor the market may even notice, let alone care. In fact, it wouldn't surprise me if Tesla quietly ended its solar installations altogether, at least until it's worked the kinks out of its experimental Solar Roof technology.
In the meantime, investors should focus instead on Tesla's automotive strategy and performance, because unlike SolarCity, that's what will make or break the company.