SolarCity and Tesla Working Together
In a previous article, I explained why Tesla and SolarCity stock move together.
There is now a new reason. On November 5, SolarCity announced that it is offering a smart energy storage system called DemandLogic that uses batteries from Tesla and learning software to allow businesses to reduce their energy bill by storing electricity to reduce peak demand and provide backup power during grid outages.
Not coincidentally, Tesla and SolarCity stock rallied together.
A competitive advantage for SolarCity
I have always thought SolarCity's competitive advantage was just advertising. SolarCity is very good at advertising to investors by raising a lot of capital at low cost, and advertising to customers by pairing up with home-builders such as Pulte Homes and Toll Brothers. Putting solar panels on Wal-Mart was a master stroke.. I didn't think, however, that SolarCity had any notable proprietary technology.
The Thusday announcement has changed my opinion on SolarCity, however. I now believe the company will have a technological competitive advantage in Tesla's battery technology and economies of scale. It reinforces my belief that SolarCity and Tesla are figuratively part of a common entity. They have the same chairman. They cross-promote. Their stocks are highly correlated. They share technology together.
Economical energy storage is the last piece of the puzzle that will make distributed power a true killer app. Once energy storage is perfected, customers can be independent from the grid, because they will have power when the sun goes down.
That said, DemandLogic is just an initial product. It is principally geared for businesses, not consumers. I don't expect DemandLogic to generate any significant revenue for SolarCity in the near future. It's just a positive sign of what might be as Tesla achieves economies of scale in producing more efficient batteries.
The announcement of SolarCity's DemandLogic could also spur SunPower to more aggressively look for a similar partnership with an energy storage provider. While it has the industry's most efficient and durable panels, SunPower does not currently offer any energy storage solutions.
The bottom line
Whether SolarCity will succeed in disrupting the grid or Tesla will succeed in disrupting transportation is an open question. Based on current market prices, the market is saying the two have a chance.
Given the fact that they are not truly profitable, the viability of either companies is only as strong as its stock price. There will be many future challenges for both companies. The threatened utility and vehicle companies will push back at some point. Right now the U.S. government is helping Tesla and SolarCity grow with very generous tax credits and rebates. If those tax incentives reverse due to lobbying or other factors, it remains to be seen whether the two companies can stand on their own two feet.
Whatever happens in the future, I think the announcement of SolarCity's DemandLogic is an optimistic sign for both SolarCity and Tesla shareholders.
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The article SolarCity and Tesla Working Together originally appeared on Fool.com.Jay Yao has no position in any stocks mentioned. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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