Tesla, Inc. (NASDAQ: TSLA), the American electric vehicle superpower, has come under pressure this year due to a slowdown in EV sales. However, Tesla Energy, which is home to the company’s energy storage business, seems to be well-positioned to grow in the future despite many investors ignoring the massive potential of this sector. In Q2, battery energy deployments reached an all-time high of 9.4 GWh, which helped the company book $3 billion in revenue. Encouragingly, the gross margins of the energy business improved substantially from 18.4% in Q2 2023 to 24.6% in Q2 2024, highlighting the strong profitability potential of this business segment. The growing importance of the energy business can be seen from the 16.3% contribution to total gross profit in the last quarter compared to just 6% a year ago.  

A Rush To Diversify

Tesla’s core business, the EV segment, has faced numerous challenges this year, including persistent issues with scaling production, regulatory scrutiny for the autopilot feature, increasing competition from Chinese EV makers such as BYD, and a broad slowdown in EV growth resulting from a slowdown in global economic growth and phasing out of EV subsidies in key markets such as China. The company also scrapped plans for a more affordable EV, denting investor sentiment further.

Amid this slowdown, Tesla has shifted its focus to other areas of the business. For instance, CEO Elon Musk has developed a new interest in artificial intelligence after founding xAI, a standalone company focused on the development of AI models. A couple of months ago, xAI raised $6 billion to support its ambitious AI goals. Tesla has also teased investors with its robotaxi plans in recent months, promising to disrupt the ridesharing sector with robotaxis developed in-house. Ark Invest, led by Cathie Wood, believes the robotaxi business will be Tesla’s biggest growth driver through 2030. However, Tesla is facing problems with its robotaxi division already, which forced the company to delay the robotaxi introduction event from August to October.  

Is It Enough?

Tesla’s aggressive expansion to the energy sector comes at a time when the global transition to renewable energy is gaining traction. In 2023, renewable energy capacity additions reached a record high of 473 gigawatts, with solar energy dominating this capacity expansion, accounting for 73% of this growth. Tesla’s energy products such as Powerwall and Megapack will enjoy strong demand amid this growth. That said, Tesla’s energy business still accounts for around 12% of total revenue, which reveals the important role played by Tesla’s core EV business. In the absence of a major recovery in the EV business, Tesla will continue to struggle to post meaningful earnings growth. This, in return, will limit the room for Tesla stock price appreciation in the foreseeable future.

Dilantha DeSilva does not have positions in this company. Stocks.News has positions in Tesla.