Tesla CEO Elon Musk is no stranger to risky but successful ventures. He's helped found companies such as PayPal and other leading edge tech firms, including an aerospace manufacturer to help colonize Mars.
So when Musk last week unveiled Tesla Energy and its line of lithium-ion batteries to power homes and businesses, the reaction from investors and shareholders was positive.
Tesla, however, is not yet profitable. And as the company works to get in the black, Musk plans to invest $10 billion to build Gigafactories to make the new batteries.
"The market has bought into [Musk's] story. His story is, 'We're going to grow quickly, we'll continue to invest back into the business, and while we have a high capital cost business, it will eventually be profitable,'" said Brian Buchwald, CEO of Chinese market data firm Bomoda. "So his challenge is, what if Tesla doesn't continue to grow quickly? Then he's going to be in trouble.
"And, right now they're losing a ton of money," he added.
Tesla's market cap is $29 billion. Last year, the company did $3.2 billion in revenue with a net loss of $294 million.
On Wednesday, Tesla reported first quarter earnings of $1.1 billion, with a GAAP net loss of $154 million, or $1.22 a share. Analysts had expected sales of $1.04 billion for the quarter, after $713 million a year ago. As a result, the electric carmaker's share price rose 2% on the narrower-than-expected loss.
Musk has said Tesla will not be profitable until 2020.
It's not unusual for start-ups to remain unprofitable for years as they build a market base. Musk now plans to initially invest $5 billion in the Gigafactories, which will manufacture the new stationary battery line for newly formed Tesla Energy.
It's an enormous gamble, Buchwald said.
Last week, Tesla unveiled two versions of the Powerwall -- a 7kWh ($3,000) module for daily use and a 10kWh ($3,500) pack that's being pitched as a backup system. A commercial battery, called the Powerpack, will hold 100kWh of power and sell for $25,000 each. The batteries are designed to store electricity when it's cheap and release it when it's costly during peak use hours. The batteries could significantly cut electricity costs for homes and businesses, especially when combined with a solar power system.
During the first quarter earnings call, Musk said Tesla Energy has already taken more than 35,000 reservations for the Powerwall battery, and 2,800 for the Powerpack from businesses.
"The response has been overwhelming. Like, crazy," Musk said during the call. "We're basically sold out through the first half of next year."
The batteries are expected to begin shipping in three to four months.
Buchwald said the risk with the battery business is that Tesla will take its eye off its car operations, begin missing shipping dates and push out quarterly earnings growth. Then investors will begin to ask, "Where's our return?
"Then you will have shareholder push back," Buchwald said. "Look what happened to AOL. They started building out their Patch platform that cost a couple hundred [million] to build, and Ken Armstrong had to abandon it with $150 to $200 million in applied costs, because shareholders didn't support it."
AOL eventually sold off Patch, a nationwide local news service.
Musk has announced that Tesla's latest vehicle, a more affordable $35,000 SUV called the Model X, will begin shipping in March 2016. The first of Tesla's Gigafactories are also expected to be completed next year.
Along with Tesla, Musk is chairman of SolarCity, a residential solar system installer that now commands 30% to 40% of the U.S. market. That creates a unique market opportunity for bundling Tesla's lithium-ion batteries with SolarCity's solar power systems.
SolarCity, run by Musk's cousin, Lyndon Rive, has already begun taking orders for Tesla's 10kWh backup battery, and plans to begin taking orders for the 7kWh battery "in the coming months," according toy spokesman Jonathan Bass.
Bass said the company just achieved the largest sales lead day in its history for all products when it began taking orders for the batteries last Friday.
SolarCity will provide financing for its solar power and battery storage systems that "essentially splits revenues that grid services provide." How those revenues will be shared was not clarified by SolarCity.
SolarCity will install the 10kWh batteries for about $5,000, which includes the cost of the $3,500 battery. SolarCity's fully-installed battery and solar system costs are about one-third of what they were a year ago, the company claims. And, it expects those costs to continue to decline as manufacturing scales.
"Over the next 5-10 years, these cost reductions will make it feasible to deploy a battery by default with all of our solar power systems," SolarCity said in a statement.
But batteries are only one part of the distributed power puzzle. Solar power systems require inverters, which change electricity from direct current to useable alternating current. They also require software to manage distribution to the home and battery systems, according to Dean Frankel, an analyst wiht Lux Research.
"Unlike electric vehicles, in stationary batteries there is more of a relative cost contribution coming from power electronics, software, and installation," Frankel said. "Without more vertical integration -- and perhaps even some acquisitions and Gigafactory-like efforts dedicated to inverters -- Tesla is limiting its growth potential here."
The distributed energy storage market already has many players offering standalone and solar-connected battery systems, so Tesla is certainly not the first to market. However, the electric carmaker can scale its operations in a way that few of its competitors can do, largely through its relationships with Panasonic for lithium-ion cells and SolarCity for solar panels.
Deutsche Bank analysts also said Tesla is using its influence to attract a solid list of partners to help develop, test, market, and distribute the battery products. Partners already include SolarEdge, which makes PV inverters, and Advanced Microgrid Solutions, which installs energy storage systems. Tesla has also partnered with power grid operators OnCor, AES and Southern California Edison.
Deutsche Bank said Tesla has yet to provide "sufficient detail" to validate its battery products, "and the company's initiative is simply too new to gauge the financial/stock implications."
"We nonetheless came away with the view that Tesla Energy is likely to be more significant than investors currently perceive," Deutsche Bank wrote in a research note. "We continue to note that our model and our target for Tesla currently incorporates zero benefit from Tesla Energy."