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Stock Analyst Update

Tesla Moves Into Texas Retail Energy Business

We think the strategy to become a retail energy provider makes sense and maintain our fair value estimate.

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On Aug. 16, Tesla (TSLA) applied to become a retail energy provider in Texas. We think the Public Utility Commission of Texas will approve the company's application later this year as Tesla meets the minimum retail energy provider requirements. After reviewing the filing, we think Tesla's plan will be to sell energy to customers who already own a Tesla vehicle. The move is in line with our view that Tesla will average double-digit annual revenue growth and see margin expansion over the next decade. As such, we maintain our $600 fair value estimate. Our narrow moat rating is also unchanged. At current prices, we view the shares as slightly overvalued, trading in 3-star territory but roughly 20% above our fair value estimate.

We think Tesla's strategy to become a retail energy provider makes sense, as it aligns with the company looking to expand into complementary industries for its customers. We view the move in the same manner as Tesla's entrance into the insurance business. Becoming a retail energy supplier should allow Tesla to win a greater share of its customers' wallets while also benefiting its customers.

Tesla will probably use Texas as a test market for selling energy. If successful, the company could move into the other 16 U.S. states with deregulated electricity markets. We think Tesla could have an advantage in the retail energy market by using its software to help customers reduce home charging costs by prioritizing charging when electricity is cheaper.

Separately, Tesla filed plans to build 350 megawatts of battery storage in Texas. We think utility-scale batteries in Texas can be profitable by supplying energy during peak demand periods when market prices are high and charging when market prices are low. We think the state's large and growing share of wind and solar energy will depress market prices, keeping costs low for off-peak charging.

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Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.