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Tesla’s Earnings Potential For Solar Roof Shingles Is Actually Pretty Small

Friday, November 25, 2016 8:25
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From Tesla Motors Inc’s (NASDAQ:TSLA) new solar roofs could be a huge boon for the company if the product takes off, but how big is that market?

The size of the target addressable market (TAM) is a key question for investors considering Tesla or any other prospective stock in the space.

Starting with the basics, the average U.S. house is about 2,600 square feet. Assuming that the average house is 1.5 stories (that is 1 single story house for every two-story house), then that leaves a 1,300 square foot footprint, probably in something like a 24’x54.5’ box (smart builders generally build in increments of 16” so they can maximize efficient use of studs which is the standard construction skeleton in most markets).

Next, given an average roof pitch of 8/12, implies a roughly 14.5 foot rafter length. Adding a 2” overhang takes us out to about 17 foot giving a total roof area of about 1,870 square feet – or about 19 squares.

Elon Musk recently declared that his solar roof will be cost competitive with traditional roofs which one has to interpret to mean shingles. Certainly, wood shakes, terra cotta tile, and slate are all used on roofs, but they are a lot less common (and a lot more expensive) than shingles. So how much does a shingle roof cost?

Roof shingles are sold in bundles with 3 bundles to a square, and a typical bundle usually costs anywhere from $25-$40 depending on shingle quality and style. That means the material cost for an average roof covering 57 bundles (19 square), is anywhere from $4,275 to $6,840. Of course that does not count labor, but it’s unlikely Musk was including labor cost in his estimates either.

So the average roofing material cost of perhaps $5,500 for a single house. Assuming, a roof is good for about 20 years, that’s the equivalent of about $275 per house per year. And about 100 million homes in the U.S. means that the total TAM in a given year is about $27.5 billion.

Clearly that’s a significant figure, but the question is how much market share could solar tiles really capture? That’s a harder determination to make. There are about 5 million houses worth of solar panels in the U.S. as of late last year, so it might be that solar tiles could never capture more than about 5 percent of total roof share. That’s total speculation of course, but it’s a reasonable place to start.

Even if solar tiles don’t amount to more than 5 percent of roof share over the next few years, the nascent market could add significantly to Tesla’s topline (as well as any other firm that chooses to get involved in the space of course). 5 percent of $27.5B is $1.375B. That’s more than a third of Tesla’s total revenue last year ($4.05B). In other words, the new roof tiles could move the needle for Tesla over time.

At this stage, it’s very hard to get a sense for what the profit margins on roof tiles would be. Panel margins are not great for the most part (though they vary widely between firms), but roof shingle margins are much better (~around 30-40 percent), and wood shakes and terra cotta tile margins are similar. The key here is economies of scale and consistent continuous production processes. If efficient economics are applied to solar tile production, the market is probably worth at least $400M in annual profit. Investors should take heed and consider what players may come out on top in the end.

Tesla shares rose $1.78 (+0.92%) to $194.92 in Friday morning trading. Year-to-date, TSLA has fallen -18.68%, compared with an +8.52% gain in the benchmark S&P 500 index during the same period.


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