When Tesla (NASDAQ: TSLA) acquired SolarCity for $2.6 billion in 2016, it was the U.S.'s biggest residential solar installer by a wide margin. Since then, management has laid off workers from the unit, changed its sales strategy, and stood by as competitors took market share from it year after year. After the dismal quarter it just completed -- another in a long string of them -- it looks like Tesla has now fallen behind Sunrun (NASDAQ: RUN), Vivint Solar (NYSE: VSLR), and SunPower (NASDAQ: SPWR) for market share in residential solar.
The bigger problem is that Tesla may not have any way to recover from this decline. The infrastructure that built SolarCity is gone, and new products that once had promise don't seem to be anywhere near reality.
Image source: Tesla.
Oh, how the mighty have fallen
In the first quarter of 2019, Tesla installed 29 megawatts (MW) of solar, which was down 65% from a year earlier, and nearly 90% off its single-quarter peak of 258 MW, set in 2015. It's also less than what Sunrun (86.2 MW), Vivint (45.6 MW), and SunPower (52 MW) installed in the quarter. (None of them have released their Q2 2019 reports yet.)
That steep drop came at the same time as Tesla slashed the cost of its solar products to less than $2 per watt (after tax benefits) and moved its sales to an online model. The theory was that customers would flock to buy via the website due to the lower cost, but the that's not what's happening. As it turns out, residential solar system sales are moved more by installers pushing them door-to-door than they are pulled by consumers demanding green energy.
Where are the new products?
Investors didn't expect Tesla's residential solar business would turn out this way. In 2016, the company announced a solar roof that promised to change the business forever by integrating solar cells into roofing tiles. It was arguably the most innovative product ever introduced in the solar industry, but its unveiling by Elon Musk seems to have been the high point in its life cycle. Today, the solar roof is little more than an afterthought for Tesla.
A more incremental innovation of high-efficiency solar panels that tied seamlessly into the home were supposed to make the company's offerings more appealing. That doesn't appear to be moving the needle either.
Finally, the Powerwall doesn't seem to have done anything to help the solar business. Tesla has in the past asserted that EVs, energy storage, and solar belonged together, and predicted that customers would buy all three at once. The company's energy storage business is booming, driven by growth in utility and commercial scale projects, but its residential Powerwall isn't helping drive solar system sales at all. In short, the case for a fully integrated renewable energy company seems to have been debunked.
Where does Tesla solar go from here?
Musk and Tesla may not be officially giving up on solar energy yet, but they might as well at this point. Solar has shrunk to a tiny portion of the company, and it's probably more of a headache than a value-adding business at this point. Given the fact that three competitors now have a larger market share, it may be time to move on.
Tesla could potentially sell its manufacturing facilities and technology to competitors. A premium solar supplier like SunPower might be interested in the solar roof technology, although there probably isn't much financial value to the product, given how little traction it has found in the market.
The installation business and the portfolio of solar assets still on Tesla's balance sheet would also have value, potentially for a company like Sunrun or Vivint Solar.
Finally, Powerwall could be the biggest beneficiary if Tesla got out of solar. It is arguably a best-in-class product, but competitors are no doubt reluctant to promote to their customers the idea of using an energy storage system and inverter made by a rival. However, if Tesla shuttered its solar business, it could partner with multiple installers on energy storage.
Tesla has proven that it has no future in solar manufacturing and installation. It's time investors recognize that reality.
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