Tesla's 'under the radar' energy segment deserves attention amid rapid growth, says Baird

By James Rogers

Tesla's energy segment contributes roughly $41 per share to Tesla's valuation, says Baird Equity Research

Tesla Inc.'s energy segment may not grab as much attention as the company's electric vehicle business, but its contribution to the company's valuation should not be under-estimated, according to Baird Equity Research.

"Rapid growth in deployments and gross margins exceeding those of the Automotive business have begun shifting attention to this component of the company and raised the question of the Energy segment's contribution to TSLA's valuation," wrote Baird analyst Ben Kallo, in a note released Thursday. Baird believes that the segment contributes roughly $41 per share to Tesla's combined valuation and views the energy segment "as one of the most under the radar aspects of the broader business."

The analyst firm highlighted the impact of Tesla's Powerwall residential and commercial battery and the company's "utility-scale" Megapack.

"Utility-scale has been viewed by many in the space as one of the brightest spots for renewables in recent past, and we agree," wrote Kallo. "The headwinds of higher interest rates and high upfront costs for many renewable technologies have been more easily absorbed by large developers than individuals. We expect this to continue for the near-term as interest rates will likely remain elevated for the foreseeable future."

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Baird's base assumptions around Tesla's energy business run through 2029. "Key assumptions include 25% gross margins, 12% EBIT margins, and interest/tax expenses proportionate to the Energy business' percentage of total company revenue (i.e. Energy is 10.2% of our 2024E combined revenue so it bears 10.2% of interest/tax expense)," the analyst added.

However, Baird acknowledges that its assumptions may be light on volume. "TSLA's Megapack factory in Lathrop, CA is expected to reach annual production capacity of 40 GWh by year-end 2024 with the Shanghai factory ramping in 2025," wrote Kallo. "Our estimates assume a conservative ramp time and are likely biased to the upside on volume." Baird has an outperform rating and $280 price target for Tesla, but notes that the energy segment's valuation is not specifically broken out in the price target.

Of 56 analysts surveyed by FactSet, 22 have an overweight or buy rating, 22 have a hold rating, and 12 have an underweight or sell rating for Tesla.

Related: Tesla moves forward with a plan to build an energy-storage battery factory in China

Other analysts have also cited the benefits that the energy segment, which includes storage products Powerwall, Megapack, and solar offerings, bring to Tesla.

Tesla's energy segment, although dwarfed by the company's electric vehicle business, is growing. During the company's recent second-quarter results energy generation and storage revenue was $3.014 billion, up from $1.509 billion in the prior year's quarter. Total automotive revenue was $19.878 billion, down from $21.268 billion in the same period last year.

At 10:08 am Eastern Time Tesla shares were down 2.4% and trading at $202.75. The stock is down 18.3% in 2024, compared with the S&P 500 index's SPX gain of 13.8%.

-James Rogers

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08-14-24 1020ET

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