On Wednesday, electric vehicle (EV) pioneer Tesla (TSLA 15.31%) released third-quarter 2023 results that disappointed investors, who drove shares down 9.3% on Thursday. That reaction stemmed from a few factors: revenue and earnings missing Wall Street's expectations, the gross margin's continued decline resulting from the company's ongoing vehicle price cuts, and CEO Elon Musk's cautious tone on the earnings call.
But there was an electrifying bright spot in Tesla's Q3 report: the performance of its energy generation and storage segment. This business has two parts -- energy storage and solar. The former's products include lithium-ion-battery-based stationary energy storage systems (Powerwall for residential, Powerpack for businesses, and Megapack for utilities and large-scale commercial projects), while solar's products include solar panels and solar roof tiles.
Let's dive into this business, which isn't getting enough attention.
Image source: Getty Images.
Tesla's energy business now accounts for nearly 7% of its total revenue and more than 9% of its gross profit 2022 quarters:
| Quarter | Energy Business' Percentage of Total Revenue | Energy Business' Percentage of Total Gross Profit |
|---|---|---|
| Q3 2023 | 6.7% | 9.1% |
| Q2 2023 | 6.1% | 6.1% |
| Q1 2023 | 6.6% | 3.7% |
| Q4 2022 | 5.4% | 2.8% |
| Q3 2022 | 5.2% | 1.9% |
| Q2 2022 | 5.1% | 2.3% |
| Q1 2022 | 3.3% | N/A: segment had negative gross profit |
Data source: Tesla. Calculations by author.
There are two reasons Tesla's energy segment's percentage of the company's total revenue and earnings have been growing more quickly in recent quarters. First, its revenue and gross profit have been growing in absolute, or dollar, terms. Second, the its core auto segment's revenue growth has slowed and its profitability has declined.
Tesla's "services and other" segment is not included in the charts because this article's focus is the energy segment. Moreover, while the service business is profitable, it has little effect on the company's overall profits. In Q3, it contributed 3.1% to gross profit, while the energy business contributed nearly three times that percentage.
If all goes well with Tesla's plans, the services business should eventually contribute more to the company's profits. As one example, the company's paid Supercharging business, which is profitable according to the Q3 release, is poised to grow because other automakers have been adopting Tesla's charging connector system, the North American Charging Standard (NACS).
Tesla's energy business has been growing revenue faster than its auto business for the last 4 quarters
For context, here are the absolute numbers for Q3 2023: Total revenue grew 9% year over year to $23.35 billion, which fell somewhat short of the $24.1 billion Wall Street had expected. Auto segment revenue increased 5% to $19.63 billion, energy generation and storage revenue surged 40% to $1.56 billion, and "services and other" segment revenue jumped 32% to $2.17 billion.
| Quarter | Energy Business' Revenue Growth YOY | Auto Business' Revenue Growth YOY | Overall Revenue Growth YOY |
|---|---|---|---|
| Q3 2023 | 40% | 5% | 9% |
| Q2 2023 | 74% | 46% | 47% |
| Q1 2023 | 148% | 18% | 24% |
| Q4 2022 | 90%* | 33% | 37% |
| Q3 2022 | 39* | 55% | 56% |
| Q2 2022 | 8%* | 43% | 42% |
| Q1 2022 | 25* | 87% | 81% |
Data source: Tesla. *Calculations by author. YOY = year over year.
In Q3 2023, as I wrote in my earnings article, the energy segment's growth was "driven by a 90% increase in energy storage capacity deployments to a record 3.98 gigawatt hours (GWh)." This powerful growth more than offset the solar business' poor performance, as "solar power deployments dropped 48% to 49 megawatts (MW), which the company attributed to 'sustained high interest rates and the end of net metering in California.' "
Beyond just the most recently reported quarter, the energy segment's growth has been fueled by the stationary storage business. More specifically, the primary growth driver has been robust demand for Megapacks.
You might be wondering what's up with the energy segment's slow growth in Q2 2022. That was a period in which the global semiconductor shortage was at its worst. So, Tesla could not fulfill the strong demand for its energy storage products.
The energy business' gross profits are also growing rapidly
| Quarter | Energy Business' Gross Profit Growth YOY* | Auto Business' Gross Profit Growth YOY* | Overall Gross Profit Growth YOY |
|---|---|---|---|
| Q3 2023 | 266% | (30%) | (22%) |
| Q2 2023 | 187% | 0% | 7% |
| Q1 2023 | N/A-flipped to positive from negative. | (24%) | (17%) |
| Q4 2022 | Same as above. | 13% | 19% |
| Q3 2022 | 3,367%** | 42% | 47% |
| Q2 2022 | 385% | 41% | 47% |
| Q1 2022 | N/A-negative in period and year-ago period. | 132% | 147% |
Data source: Tesla. *Calculations by author. **This percentage is so huge because the year-ago gross profit was a tiny positive number. YOY = year over year.
In the last few quarters, Tesla's energy segment has been helping cushion the blow to the overall gross profit growth, which is stemming from the auto segment's declining (Q1 and Q3, 2023) or flat (Q2 2023) gross profit growth.
Tesla's energy segment is now more profitable than its auto segment
| Quarter | Energy Business' Gross Margin* | Auto Business' Gross Margin | Overall Gross Margin |
|---|---|---|---|
| Q3 2023 | 24.4% | 18.7%* | 17.9% |
| Q2 2023 | 18.4% | 19.2%* | 18.2% |
| Q1 2023 | 11% | 21.1%* | 19.3% |
| Q4 2022 | 12.1% | 25.9% | 23.8% |
| Q3 2022 | 9.3% | 27.9% | 25.1% |
| Q2 2022 | 11.2% | 27.9% | 25% |
| Q1 2022 | (11.7%) | 32.9% | 29.1% |
Data source: Tesla. *Calculations by author.
The Q3 2023 quarter was the first quarter that Tesla's energy segment's gross margin exceeded its auto segment's gross margin.
Many avenues for long-term growth
In Q3 2023, Tesla's energy and services segments combined accounted for 16% and 12% of the company's overall revenue and gross profit, respectively. These percentages seem poised to continue to grow. The energy business is already materially adding to the company's profitability, and both segments have significant long-term growth potential.
In short, Tesla is much more than just an EV maker. So, investors should focus on the company's overall results and overall long-term growth potential, rather than exclusively or nearly exclusively homing in on the auto business.
