“The issue with existing batteries is that they suck” – Elon Musk, CEO of Tesla

In keeping with its name and goal of energy innovation, Tesla recently revealed its new stackable battery system that stores electricity for both domestic and commercial use. Although no specific figures have been released, the new batteries are expected to increase Tesla’s annual revenue by billions.

Domestic units known as the Powerwall are currently available for pre-order for shipping in the summer. Prices start from $3,500 and units will provide enough electricity to run some home appliances for a few days in a blackout. The consensus is that this price point appeals to those whose homes are solar powered, but it is not yet cheap enough for either the average US or the average UK national grid-connected customer.

The larger version, the Powerpack, has been gaining traction and Tesla counts Wal-Mart, Amazon and Target as its customers. An undisclosed utility company has also approached Tesla for an order of 2,500 Powerpack towers. In the short term, this seems to be more promising than the batteries for residential use and commercial success could lead to penetration into the energy industries of emerging markets that rely heavily on diesel such as India – the potential here is therefore extremely high.

Tesla’s Relationship with its Investors

Tesla is not without its sceptics and its own investors wonder when the company will begin to make money. In the past three years, Tesla has made losses of $294m, $74m and $396m from revenues of $3.2bn, $2bn and $413m in 2014, 2013 and 2012 respectively. In the face of increasing shareholder pressure, there are three areas that could perhaps be streamlined: “Cost of Revenue”, “Cost of Research and Development”, and “Cost of Sales, General and Admin.”. These are the exact figures:

All values in $000’s
	2013/2014	2012/2013	2011/2012
Total Revenue	3,198,356	2,013,496	413,256
Cost of Revenue	2,316,685	1,557,234	383,189
Cost of Research and Development	464,700	231,976	273,978
Cost of Sales, General and Admin.	603,660	285,569	150,372

Given that Tesla is so high profile and tech-dependent, it is not surprising to see such high costs. However, these figures significantly lower its total revenue and could be reduced to ease investor discontent.

It was expected that Chinese sales of Tesla’s Model S electric car would be roughly on par with US sales, but Tesla has so far found China to be a difficult market With two China managers having already left the company in 2014, a positive international outlook is something that investors will gauge Tesla’s success by. In recognition of this, and under need to better tap into China, Musk has not been shy of informing the company that country managers who are ‘not on a clear path to positive long-term cash flow’ will be removed.

A Long Term Bet

After failing to meet its target for the number of car deliveries in 2014 and inconsistent earnings per share, what does the future hold for Tesla?

Judging from the falling prices of batteries and the increase in the economic viability of solar power, the energy storage industry will soon be breaking open and Tesla’s position within the domestic battery market will pivot on how much economic appeal it can find with consumers. However, its already-strong base in the commercial market, increased projections for car deliveries (50,000 for 2015 growing to 500,000 by 2020) and the expected release of its new SUV (the Model X) suggest a more investor-friendly company with significantly higher revenue. Whether revenue will result in profit remains to be seen, but Tesla is a high profile, research-dependent company so a corresponding increase in the three aforementioned costs is also to be expected.

Tesla has previously been linked to an acquisition by Google and there are current rumours of an acquisition by Apple. These rumours show that, despite the fact that Tesla is not currently making money, its potential is extremely concerning/attractive to two of the most pioneering technology companies. Regardless of how other companies view the company, this can only provide Tesla with a positive long term outlook. Investors who are still bullish on the company are therefore likely to be betting on the company either to continue to grow and eventually make a profit, or to become a vehicle for a successful exit upon an acquisition, and each of these scenarios is likely to compensate investors for their current dissatisfaction.

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