Is Tesla Stock a Buy for Energy Storage Upside?

Tesla (TSLA) has long been synonymous with electric vehicles (EVs), but as the company continues to innovate, its energy storage division is emerging as a critical driver of future growth. Recently, William Blair analysts assigned Tesla an “Outperform” rating – not because of its EV dominance, but due to what the brokerage firm thinks is the overlooked potential of its energy business. The analyst described Tesla’s energy division as having an “Apple-esque ecosystem for the future of energy,” suggesting that the company is laying the foundation for a comprehensive energy solution that goes beyond just cars.

While Tesla’s electric vehicle business has received most of the attention, its energy storage division is quietly gaining momentum. The Megapack and Powerwall products are designed to revolutionize how both commercial and residential customers store and use energy. With global demand for energy storage rising, driven by the transition to renewable energy sources and the need for grid stability, Tesla is positioning itself as a leader in this space. Despite these advancements, many investors continue to undervalue the role that Tesla’s energy business will play in the company’s overall growth trajectory.

With TSLA stock down 11.7% year-to-date and lagging behind the broader market, is Tesla a good investment for those seeking to benefit from the potentially overlooked upside in the company’s energy storage business? Let’s find out.

William Blair Names Tesla the Apple of Energy

On Aug. 29, William Blair analyst Jed Dorsheimer began covering the electric vehicle stock, assigning it an “Outperform” rating based on the belief that its energy storage business is undervalued. 

Dorsheimer stated that the firm considers Tesla Energy to be the most undervalued aspect of Tesla’s overall business and anticipates that investor focus will shift towards the energy storage business, especially given the moderated expectations for the EV market in the near term. The analyst emphasized that grid stabilization, data center expansion, and the integration of renewables are the three primary factors driving the potential growth in energy storage.

“Combined with the auto business and longer-term opportunities like AI, robotaxi, and robotics, we see Tesla as a technology leader with an Apple-esque ecosystem for the future of energy,” Dorsheimer said in a note.

In terms of valuation, Tesla trades at an enterprise value of 29 times the firm’s 2026 EBITDA estimate and a price of 49 times the 2026 EPS estimate. Although these multiples are relatively challenging to justify, William Blair believes that the energy evangelism of CEO Elon Musk, the company’s first principles approach, and its technological edge justify the substantial valuation premium.

A Deep Dive Into Tesla’s Energy Division

Tesla Energy’s comprehensive strategy encompasses energy storage, electricity sales, and trading. Tesla CEO Elon Musk has consistently forecasted strong growth for energy storage, fueled by the need to integrate volatile renewable energy sources into the grid and to handle the supply-demand dynamics stemming from electrification, including the use of Tesla’s own electric vehicles. During Tesla’s Q2 earnings call, Musk stated that the energy business is experiencing faster growth than any other segment. Energy storage deployments more than doubled, driven not only by Megapack but also by Powerwall contributions, leading to record revenues and profits for the energy business in Q2. 

In the second quarter of 2024, Tesla deployed 9,400 MWh of energy storage – a record high, but still a negligible amount compared to what Tesla aims to do to assist the world in transitioning to sustainable energy. Tesla is seeing a growing demand for sustainable energy solutions from both commercial and residential customers, surpassing the company’s manufacturing capabilities. Based on this, Musk stated that Tesla is increasing production at its U.S. factory and constructing a Megapack factory in China, which should roughly double – and potentially even triple – the output. This increased demand signifies a notable shift in TSLA’s revenue dynamics, positioning energy storage to play a more prominent role.

Meanwhile, energy generation and storage revenue doubled year-over-year to $3.01 billion, driven by a surge in Megapack deployments compared to previous periods. It’s worth noting that Tesla’s large-scale battery storage solutions for commercial installations are called “Megapacks,” while the smaller “Powerwall” is designed for residential use. In the second quarter of 2024, Tesla Energy comprised 11.8% of the company’s total revenue, showing a steady increase from 7.7% in the first quarter of 2024. Gross profit for the energy generation and storage segment soared 166% year-over-year to $740 million, with the gross margin rising from 18.4% to 24.6%. Notably, based on its current growth trajectory, Tesla’s energy profits are projected to surpass its automotive business by 2026.

Tesla’s Megapack initiative emerges as a strong driver of revenue. With capacities planned to reach up to 40GWh in California and similarly sized factories in Shanghai, Tesla’s revenue potential from Megapacks is significant. The latest Megapack battery design sells for approximately $1.04 million each, and grid-level storage farms require 100 or more of these batteries. Therefore, it’s unsurprising that CEO Musk believes sales from energy systems could eventually surpass those of its electric vehicles. 

According to the “Global battery energy storage system integrator ranking 2024” report by Wood Mackenzie, Tesla has surpassed Sungrow to become the leading producer in the battery energy storage system (BESS) integrator market, capturing a 15% market share in 2023. Fortune Business Insights reports that the global BESS market is expected to expand from $25.02 billion in 2024 to $114.05 billion by 2032, achieving a compound annual growth rate (CAGR) of 20.88% throughout the forecast period. Under the conservative assumption that Tesla retains its 15% market share through 2032, sales from this segment could amount to $17.1 billion. Again, these are very conservative estimates, as some analysts predict that the energy storage market could expand to $546 billion by 2035.

The second component of Tesla’s energy strategy – deployment and sales of electricity – could position it as a global utility. Tesla is adopting distinct yet related strategies for the domestic and industrial energy markets. In the domestic realm, it is advancing the concept of the “Virtual Power Plant,” or VPP. This concept connects Tesla’s domestic power storage systems, known as Powerwalls, into a distributed power network. Powerwall owners must consent to connect their systems, at which point they become part of a network of storage systems. Tesla can then activate hundreds or even thousands of individual home storage units simultaneously, turning them into a single, large, short-term grid-level power source. This allows Tesla to offer temporary support to the grid.

Tesla’s VPPs are growing globally, extending across the U.S., Europe, and Asia, with their expansion limited only by production capacity. As Tesla increases its production capabilities, revenue from Powerwall installations and VPP operations is set to experience exponential growth.

What Do Analysts Expect For TSLA Stock?

Tesla stock has a consensus “Hold” rating. Out of the 34 analysts offering recommendations for the stock, 9 suggest a “Strong Buy,” one has a “Moderate Buy” rating, 17 maintain a “Hold,” and seven recommend a “Strong Sell.” 

The stock trades above its mean price target of $198.29, but the highest target price on the Street, at $310.00, indicates an upside potential of around 41.3% from current levels.

The Bottom Line on TSLA Stock

Summing it up, I completely concur with the William Blair analyst that Tesla’s energy business is significantly undervalued and could offer substantial upside potential for the stock once investors recognize its true value.

On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.