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Investors also love Elon Musk.
What makes Tesla, the world’s leading automaker by market cap, so valuable? The obvious answer would be that it sells hundreds of thousands of cars every quarter, for which it can command a tidy premium because of how much the Tesla name is worth. When it rolls out something new — no matter how odd-looking — Tesla fans are willing to put up money for the right to order a vehicle years later. As many of the world’s biggest economies try to transition away from internal combustion, Tesla is as well positioned as anyone to benefit immensely.
But according to one of its biggest boosters on Wall Street, Tesla’s core business of selling electric cars only contributes so much.
“Global EV momentum is stalling,” wrote Morgan Stanley analyst Adam Jonas, a longtime Tesla booster, in a research report released Monday. “The market is over-supplied vs. demand. We anticipate Tesla’s 2024 outlook to be cautious on volume and profitability.” He marked down his estimate for Tesla’s 2024 sales to 2.08 million units, compared to his previous estimate of 2.25 million, with profitability falling thanks to the aggressive price cuts the company instituted last year in a bid to juice sales. Then came the thing that really hurt: Jonas also adjusted his price target for Tesla shares down from $380 to $345 — a figure well north of the $212 the shares closed at on Friday, but still a noticeable cut. Tesla shares traded down 1.5% through Monday afternoon.
For any other car company that exclusively sold EVs, this kind of price target shrinkage would be a serious problem. But Jonas doesn’t see Tesla as a car company. Or, at least, not
just as a car company.
Of the $345 Jonas thinks a Tesla share is worth, only $75 comes from selling electric vehicles. The rest is largely from businesses that either don’t exist for the company, or else don’t generate meaningful revenue compared to selling cars.
Let’s break this down: In its most recent quarter, Tesla had around $23 billion of total revenues, $19.5 billion of which came from selling cars; $1.5 billion came from its energy business, with the remaining $2 billion coming from “services and other revenue,” which include Tesla’s Supercharging network.
To Jonas, however, Tesla “is both an auto stock + an energy, AI/robotics company,” he wrote, adding that “we believe investors should not ignore the continued developments of Tesla’s other bets.” These include things like turning its cars into something more like software subscriptions, which incur recurring revenues (as Tesla already does with its Full Self Driving software) and a robotaxi network that does not yet exist, but which Jonas projects will have 230,000 vehicles by 2030. There are also projects like the Optimus humanoid robot, which Jonas didn’t put a valuation on but thinks that investors should factor in when considering whether to buy or sell Tesla shares.
To get a sense of the gargantuan scale Jonas tends to operate on, last year he wrote that Dojo, the supercomputer Tesla developed for its automated driving system, could add $500 billion of value to Tesla, even though “it is difficult to explicitly validate the many claims Tesla has made about Dojo's cost and performance.” He was confident, however, that “Tesla has a chance of bringing forth a competitive customized solution given the company’s innovation track record and capabilities.”
The idea that Tesla can be more than an electric car company — one that sprouts innovative and profitable businesses, whether from robotics or artificial intelligence — stems almost entirely from the fact that Elon Musk runs it. Musk himself is well aware of this. Last week he wrote on X, “I am uncomfortable growing Tesla to be a leader in A.I. & robotics without having ~25% voting control,” which would be about double the voting power he has now. (That voting power, of course, was substantially diluted thanks to selling billions of dollars of Tesla shares to fund his takeover of now-X, then-Twitter.)
While it’s unlikely that Musk would be able to break off the robots and AI initiatives that literally power Tesla, the threat is enough to spook investors given Musk’s obvious willingness to pursue major projects outside of Tesla (e.g. SpaceX) — and the high valuation those projects can get from investors — not to mention the amount of time and energy Musk spends on them.
You can see the implicit value investors place on Tesla’s (and Musks’s) ability to spin up new businesses not just in Tesla’s high stock price and overall valuation — around $650 billion, compared to $270 billion for Toyota and $50 billion for GM, both of which sell many, many more cars— but also in how investors value Tesla’s earnings.
Tesla’s price-to-earnings ratio, which is essentially the stock price divided by the earnings per share, is around 60, comparable to Amazon or the enterprise software company Workday, companies investors buy for their future growth or profit potential derived from selling software on a subscription basis. Plus, there’s a market mania for anything AI related, as one can see with Nvidia, which makes the chips used by many companies with AI products (including Tesla) and has gained several hundred billion dollars in market capitalization in the last year. One can also see this with Microsoft, whose OpenAI stake only gets more valuable, company drama notwithstanding.
Stolid GM, by contrast, trades at four times earnings, while Toyota is around 10.
While some of this difference can be attributed to the higher prices Tesla is able to charge for its vehicles, that can only account for so much — Tesla’s best-selling cars are its lower-end vehicles, and again, it’s been aggressively cutting prices. And while luxury automakers have higher valuations than mass market car companies, Tesla still trades higher than luxury automakers including Porsche, Ferrari, and BMW.
Jonas said in his note that his high valuation for the company “is highly dependent upon Tesla accruing value as an AI enabler,” and that “any change of organizational or legal structure that impedes Tesla’s ability to participate in the development of AI could be detrimental.”
And Jonas isn’t the only analyst who sees a substantial portion of Tesla’s value being made up of something beyond its current electric vehicle business. “A key to our bullish thesis that all AI initiatives be kept within Tesla,” Wedbush Securities analyst Dan Ives wrote in a note last week. “If Musk ultimately went down the path to create his own company (separate from Tesla) for his next generation AI projects this would clearly be a big negative for the Tesla story.”
Even if Tesla reports a disappointing outlook for its electric vehicles business with its fourth quarter earnings on Wednesday, expect analysts and investors to be interested in what Tesla isn’t doing yet but could be doing in the future — as long as Musk is still there.
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And more of the week’s top news about renewable energy conflicts.
1. Nassau County, New York – Opponents of Equinor’s offshore Empire Wind project are now suing to stop construction after the Trump administration quietly lifted its stop-work order.
2. Somerset County, Maryland – A referendum campaign in rural Maryland seeks to restrict solar development on farmland.
3. Tazewell County, Virginia – An Energix solar project is still in the works in this rural county bordering West Virginia, despite a restrictive ordinance.
4. Allan County, Indiana – This county, which includes portions of Fort Wayne, will be holding a hearing next week on changing its current solar zoning rules.
5. Madison County, Indiana – Elsewhere in Indiana, Invenergy has abandoned the Lone Oak solar project amidst fervent opposition and mounting legal hurdles.
6. Adair County, Missouri – This county may soon be home to the largest solar farm in Missouri and is in talks for another project, despite having a high opposition intensity index in the Heatmap Pro database.
7. Newtown County, Arkansas – A fifth county in Arkansas has now banned wind projects.
8. Oklahoma County, Oklahoma – A data center fight is gaining steam as activists on the ground push to block the center on grounds it would result in new renewable energy projects.
9. Bell County, Texas – Fox News is back in our newsletter, this time for platforming the campaign against solar on land suitable for agriculture.
10. Monterey County, California – The Moss Landing battery fire story continues to develop, as PG&E struggles to restart the remaining battery storage facility remaining on site.
A conversation with Biao Gong of Morningstar
This week’s conversation is with Biao Gong, an analyst with Morningstar who this week published an analysis looking at the credit risks associated with offshore wind projects. Obviously I wanted to talk to him about the situation in the U.S., whether it’s still a place investors consider open for business, and if our country’s actions impact the behavior of others.
The following conversation has been lightly edited for clarity.
What led you to write this analysis?
What prompted me was our experience in assigning [private] ratings to offshore wind projects in Europe and wanted to figure out what was different [for rating] with onshore and offshore wind. It was the result of our recent work, which is private, but we’ve seen the trend – a lot of the big players in the offshore wind space are kind of trying to partner up with private equity firms to sell their interests, their operating offshore wind assets. But to raise that they’ll need credit ratings and we’ve seen those transactions. This is a growing area in Europe, because Europe has to rely on offshore wind to achieve its climate goals and secure their energy independence.
The report goes through risks in many ways, including challenging conditions for construction. Tell me about the challenges that offshore wind faces specifically as an investment risk.
The principle behind offshore wind is so different than onshore wind. You’re converting wind energy to electricity but obviously there are a bunch of areas where we believe it is riskier. That doesn’t mean you can’t fund those projects but you need additional mitigants.
This includes construction risk. It can take three to five years to complete an offshore wind project. The marine condition, the climate condition, you can’t do that [work] throughout the year and you need specialized vehicles, helicopters, crews that are so labor intensive. That’s versus onshore, which is pre-fabricated where you have a foundation and assemble it. Once you have an idea of the geotechnical conditions, the risk is just less.
There’s also the permitting process, which can be very challenging. How do you not interrupt the marine ecosystem? That’s something the regulators pay attention to. It’s definitely more than an onshore project, which means you need other mitigants for the lender to feel comfortable.
With respect to the permitting risk, how much of that is the risk of opposition from vacation towns, environmentalists, fisheries?
To be honest, we usually come in after all the critical permitting is in place, before money is given by a lender, but I also think that on the government’s side, in Europe at least, they probably have to encourage the development. And to put out an auction for an area you can build an offshore wind project, they must’ve gone through their own assessment, right? They can’t put out something that they also think may hurt an ecosystem, but that’s my speculation.
A country that did examine the impacts and offer lots of ocean floor for offshore is the U.S. What’s your take on offshore wind development in our country?
Once again, because we’re a rating agency, we don’t have much insight into early stage projects. But with that, our view is pretty gloomy. It’s like, if you haven’t started a project in the U.S., no one is going to buy it. There’s a bunch of projects already under construction, and there was the Empire Wind stop order that was lifted. I think that’s positive, but only to a degree, right? It just means this project under construction can probably go ahead. Those things will go ahead and have really strong developers with strong balance sheets. But they’re going to face additional headwinds, too, because of tariffs – that’s a different story.
We don’t see anything else going ahead.
Does the U.S. behaving this way impact the view you have for offshore wind in other countries, or is this an isolated thing?
It’s very isolated. Europe is just going full-steam ahead because the advantage here is you can build a wind farm that provides 2 or 3 gigawatts – that’s just massive. China, too. The U.S. is very different – and not just offshore. The entire renewables sector. We could revisit the U.S. four or five years from today, but [the U.S.] is going to be pretty difficult for the renewables sector.
What I’m hearing from developers and CEOs about the renewable energy industry after the Inflation Reduction Act
As the Senate deliberates gutting the Inflation Reduction Act’s clean electricity tax credits, renewable energy developers and industry insiders are split about how bad things might get for the sector. But the consensus is that things will undoubtedly get worse.
Almost everyone I talked to insisted that solar and wind projects further along in construction would be insulated from an IRA repeal. Some even argued that spiking energy demand and other macro tailwinds might buffer the wind and solar industries from the demolition of the law.
But between the lines, and beneath the talking points and hopium, executives are fretting that lots of future investments are in jeopardy. And the most pessimistic take: almost all projects will have their balance sheets and time-tables impacted in some way that’ll at minimum increase their budget costs.
“It’s hard to imagine, if the legislation passes in its current form, that it wouldn’t impact all projects,” said Rob Collier, CEO of renewable energy transaction platform LevelTen.
Even industry analysts with the gloomiest views of the repeal say there’s plenty of projects that will keep chugging along and might even become more valuable to investors if they’re close enough to construction or operation. This aligns with recent analysis from BloombergNEF, which found the House bill would diminish our nation’s renewables build-out – but not entirely end its pace.
“The more useful way to break down which project may be hit the hardest is where the projects are going to fall in their development life-cycle,” Collier said. “Projects that have either started construction or have the ability to start construction … are going to very likely rise in terms of their appeal and attractiveness and those projects will be at a premium, if they’re able to skate through the legislative risk and qualify for tax credits.”
There is a more optimistic industry view that believes increased project costs will just be passed along to consumers via higher electricity prices. The American people will in essence have to pick up the tab where the federal tax code left it. Optimists also cite the increased use of power purchase agreements, or PPAs, between renewables developers and entities who need a lot of electricity, like big tech companies. By signing these PPAs, buyers are subsidizing the construction of projects but also insulating themselves from the risk of rising electricity prices.
The most bullish perspective I heard was from Nick Cohen, the CEO of Doral Renewables, who told me deals like these combined with rising premiums for quick energy on the grid may obviate lost credits in a “zero-incentive environment.”
“It’s not the end of the world,” Cohen told me. “If you’re in construction or you’re going to be in construction very soon, you’re fine.”
But Collier called Cohen’s prediction an “experiment” in customers’ willingness to pay for new energy: “If we’re talking about 40%, 50%, 60% of a project’s capital stack now being at risk because of tax credits, those are pretty large price increases.”
I spoke to multiple companies that have been inking massive deals as this legislation has progressed — although many were not nearly as sanguine about the industry’s future prospects as Doral. Like rPlus Energies, which disclosed last week that it closed a commitment for more than $500 million in tax equity investments for a solar and storage project in Utah. rPlus CEO Luigi Resta told me that the legislation “certainly has posed concern from our investors and from the organization” but the project was so far along that the tax equity investment market wasn’t phased by the bill.
“Many people in my company, myself included, have been doing this for more than 20 years. We’ve seen the starts and stops related to ITC and PTC in solar and wind, in multiple cycles, and this feels like another cycle,” Resta told me. “When the IRA passed, everybody was exuberant. And now the runway looks like it may have a cliff. But for us, our mantra since the beginning of the year has been ‘proceed with caution, preserve and protect.’”
However, crucially, it is important to focus on how that caution looks: Resta told me the company has completely paused new contracting while the company is completing the projects it is currently developing.
One government affairs representative for a large and prominent U.S. renewables developer, who spoke on the condition of anonymity to preserve relationships, told me that “whatever rollback occurs will just result in higher electricity prices over time.” In the near term, the only language that would truly gut projects in progress today would be “foreign entity of concern” restrictions that would broadly impact any component even remotely connected to Chinese industries. Similar language all but kneecapped the entire IRA electric vehicle consumer credit.
“It included definitions of what it means to be a foreign company that were really vague,” the government affairs representative said. “Anyone who does any business with China essentially can’t benefit from the credit. That was a really challenging outcome from the House that hopefully the Senate is going to fix.” If this definition became law, this source said, it would be the final straw that “freezes investment” in renewable energy projects.
Ultimately, after speaking to CEO after CEO this week, I’ve been left with an impression that business activity in renewables hasn’t really subsided after the House bill passed, and that it’ll be the Senate bill that undoubtedly defines the future of renewable energy for years to come.
Whether that chamber remains the “cooling saucer” it once was will be the decider.