Forget Tesla’s Cars. The Real Money May Lie in Tesla’s Battery Business

Shares of electric car giant Tesla (TSLA), which were under pressure through much of the first two months of the year, continued to claw their way back higher this week after Canaccord analyst Jed Dorsheimer released a note upgrading the stock from “hold” to “buy” — and nearly tripling his price target to $1,071 a share. (To view Dorsheimer’s track record, click here)

Tesla, argued the analyst, holds a “several-year lead” over rival electric car companies around the world. And yet, the reason Dorsheimer upgraded the stock had little to do with its electric cars… and everything to do with its batteries.

A good battery, you see, can do more than just help an electric car go “vroom!” It can also be used to store energy outside of cars. And according to Dorsheimer, Tesla’s focus on “first-principle engineering” — getting the battery science right, and planning to scale it up, before worrying about how to use all those batteries — has set up the company to not only increase its lead over rival producers of electric vehicles, but also “expand into the solar and home energy markets with its Powerwall products.”

It’s 2021 right now, and by 2022, Dorsheimer predicts that Tesla will have worked out the kinks in its supply chain to ensure that it has sufficient battery production to more than cover its automotive needs. Once that happens, “ample battery supply will allow TSLA to meet its new aggressive Powerwall campaign” (selling batteries for installation residential homes), and also increase sales to electric utilities of larger and denser Powerpack and Megapack rechargeable batteries for utility-scale energy storage.

Currently, of course, Tesla’s business is heavily weighted towards the automotive market, which is what it’s best known for. Indeed, in 2020, the company’s automotive business accounted for 94% of all revenues the company produced. But Dorsheimer predicts that the energy storage side of the business will soon take off, and take on an increasingly large amount of the revenue burden, growing to perhaps $8 billion (four times 2020 levels) by 2025, and producing gross profit margins on par with what the automotive business produces that year, about 25%. (Automotive gross margins are currently closer to 22%, while energy storage grosses less than 1%).

Helping both divisions improve their gross, says Dorsheimer, will be falling battery costs, which the analyst predicts will decline by as much as 30% in terms of dollar per kilowatt-hour. Cheaper batteries would, after all, make both Tesla’s cars, and its battery storage devices more profitable by reducing input costs.

So what’s the upshot here for investors? Drawing an analogy to Apple Computer, which dropped the second half of its name back in 2007 in acknowledgement of the growing importance of its iPhone business, Dorsheimer believes that Tesla is now “rapidly creating an Apple-esque ecosystem of energy products, harmonized in electrification,” so as to make Tesla “The Brand” (emphasis in the original) to own in electricity storage — just as it already is in electric cars.

In that regard, it’s worth pointing out that Tesla itself probably agrees with this assessment. That would explain, after all, why Tesla Motors dropped the second half of its name in 2017. Elon Musk was thinking ahead — and now the Canaccord analyst has figured out what he was thinking ahead to.

But not everyone is as enthusiastic about TSLA as Canaccord. Out of 27 analysts polled in the last 3 months, 11 say “buy,” 9 suggest “hold,” and 7 advice to “sell.” With an average price target of $701.17, the analysts expect Tesla stock to fall 6% from current levels. (See TSLA stock analyst on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.