Investment Thesis
The growth of Tesla, Inc. (NASDAQ:TSLA)’s position in the electric vehicle (EV) charging market presents a unique investment opportunity. The driving force in this growth is owed to their Supercharger network, which provides users with high-speed, strategically located charging stations. This network can greatly decrease anxiety around vehicle charging range, along with increasing convenience. It consists of Destination Charging stations and user-friendly home charging options, blending everyday activities with charging options. Tesla's approach, led by CEO Elon Musk, balances profitability with the broader goal of accelerating EV adoption, thereby enhancing Tesla’s commitment to sustainable transportation.
In order to grow their Supercharger network, Tesla has paired up with other companies, such as the collaboration with Buc-ee’s, a gas station chain. This partnership has helped open doors for Tesla's expansion and accessibility goals. Along with that, in order to make the charging stations further user-friendly, Tesla has produced its own charging app.
Of course, this expansion does not come without risks. Competition in the EV charging market has been on the rise, along with regulatory challenges regarding standardization and market dominance. In order to overcome these roadblocks, Tesla will need to maintain their innovative and strategic market adaptation. As the demand for electric vehicles grows, due to the shift towards more eco-friendly transportation, Tesla’s forward-thinking approach sets them up to be a key player in the market of EV charging.
Overall, I think the risks outweigh the rewards here. They are building the future of energy inside the company. I think the stock is a strong buy (rating upgrade).
Background: The Rise of Tesla's Convenient Supercharger Network
The introduction of the Supercharger network is paving a path for Tesla to become one of the main EV charging providers. This network consists of strategically placed, high-speed charging stations that have greatly decreased the complications of owning and using electric vehicles. As mentioned above, Destination and home charging options are greatly increasing user friendliness.
Destination Charging stations are located at places such as hotels, shopping centers, and restaurants. What’s so great about these locations is that they allow users to do other things while their vehicle charges. Due to the practicality of these charges, convenience store charging stations have significantly grown in popularity. Not only is this more convenient for consumers, but it also opens new streams of revenue for businesses. Another option for vehicle charging is home charging. Tesla provides options like the Wall Connector and Mobile Connector. These products provide overnight or off-peak hour charging, along with features such as scheduling and monitoring of charging sessions through the Tesla app.
What sets Tesla apart is their expressed mission. Led by CEO Elon Musk, Tesla’s main focus as stated on its site to be to increase the use of electric cars, rather than maximizing charging network profits. In order to achieve this, they have launched a pilot program to contribute to the expansion of Supercharger access to non-Tesla EVs in Europe.
As the global EV charging stations market is projected to continue significant growth, what will set Tesla apart from competition is their mission. Led by CEO Elon Musk, Tesla’s avowed main focus is to increase the use of electric cars, rather than maximizing charging network profits. In order to achieve this, they have launched a pilot program to contribute to the expansion of Supercharger access to non-Tesla EVs in Europe. Along with that, the shift towards Tesla’s North American Charging Standard (NACS) by other automakers supports the prediction of Tesla's heavy influence on the future of the EV charging market.
Tesla Charging Station App
Another way Tesla has made their charging stations more user-friendly is through the Tesla charging station app. For example, one of the features of the app is detailed trip planning, which allows users to add multiple stops and charging points. The app also features navigation and safety enhancements, in-car entertainment such as Apple Podcasts, and can update to include the Tesla Arcade for gaming. In order to give users added security and peace of mind, the app also provides live Sentry Mode Cameras. Additionally, a more recent feature to the app, Tesla's High-Fidelity Park Assist, offers advanced parking assistance with 3D visualizations of the car's surroundings.
Tesla’s Strategic Partnerships
With the goal of expanding their Supercharger Network, Tesla has joined forces with retail companies in order to boost the convenience of their product. One of these partnerships is with Buc-ee’s, a chain of large convenience stores and gas stations primarily located in Southern and Midwestern states. Tesla plans to install Superchargers at 26 Buc-ee’s locations across seven states: Texas, Alabama, Georgia, Florida, Tennessee, Kentucky, and South Carolina. Tesla is choosing these locations due to their presence among popular travel routes.
Aiming to make electric vehicle charging more convenient, these stations are meant to provide travelers with multiple benefits. Buc-ee’s locations are known for their large parking lots and a variety of offerings, including food and shopping. Therefore, not only will users be able to charge up their vehicle, but they are also provided with an opportunity to take a quick snack break. The partnership is beneficial to both parties, as it provides Tesla drivers with convenient and efficient charging options while also attracting potential customer traffic to Buc-ee’s locations.
What Has Changed In The Last Month?
While I recently wrote about Tesla in December, I think the adoption of new EV charging standards (adopting Tesla’s network) at the end of the month represent a game changer. Two big updates:
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Standardization of Tesla's Charging Plugs: The White House has shown support for the auto industry's initiative to standardize Tesla’s EV charging plugs across the United States, known as the North American Charging Standard (NACS). This move aims to stimulate EV sales and combat climate change. The limited availability of charging infrastructure has been a major concern for potential EV buyers in the U.S., and Tesla’s Supercharger network is the largest and most strategically located. The standardization effort has been backed by SAE International and is expected to allow any vehicle or charging equipment supplier to use, manufacture, or deploy the connector, thus enhancing charging access nationwide.
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Adoption of Tesla’s Charging Standard by Several More Major Automakers: Several major automakers, including Volkswagen Group (along with its brands Audi, Porsche, and Scout Motors), have announced plans to adopt Tesla’s NACS, starting from 2025. Previously, Tesla’s charging standard conflicted with the Combined Charging Standard (CCS) used by most other automakers. The shift towards NACS by various companies follows Tesla's decision last year to open up access to its charging network. Other major automakers like Ford, GM, Rivian, Honda, Mercedes, Hyundai, Kia, Toyota, Subaru, and Lucid have also announced their adoption of Tesla's charging standard.
Valuation: Looking at The Market Size & Opportunity
The electric vehicle (EV) charging market, particularly for Tesla, presents a substantial growth opportunity. Currently, with 2,442,270 EVs on the road, public charging stations account for 25% of all charging. Each EV, needing about 2-3 charges weekly and taking approximately 75 kWh to charge fully, results in about 26 public charging sessions per year. Tesla charges consumers about $0.40 per kWh, while on average they are charged only $0.1621 per kWh by Utilities. This means in a typical year, the average gross profit from EV charging in the United States (per vehicle) is about $2,340.
Looking forward, the market of electric vehicles is predicted to grow substantially. By 2030, predictions indicate there will be 26.4 million EVs on the roads in the U.S. This increase in EVs is expected to boost the total gross profits for the industry to $61.776 billion based on the profits per vehicle per year being constant at $2,340. If Tesla can capture 50% of this market (indications are they currently have a higher share than this in the U.S.), this would imply about $30.888 billion in Gross profits for the EV auto maker.
Given that EBITDA currently runs at about 75% of Tesla’s Gross Profit Margins, this means EBITDA opportunities here could be worth $23.166 billion annually.
If Tesla has a EV/EBITDA multiple of 23 (about ½ of the current forward EV/EBITDA multiple of 46.73), this would mean about $532.818 billion in Enterprise Value expansion to Tesla. Since there is no anticipation of much debt being taken on to fund a further expansion of the EV charging network (this is a pretty asset light business compared to heavy manufacturing), this would mean over $532 billion could roll straight down to market cap expansion.
An additional $532 billion addition to the market cap would imply ~67% upside from the current market cap (and 67% share upside assuming no more share dilution).
Future Outlook
As of 2020, the U.S. sales forecast for electric vehicles came out to 1.4 million units, but by 2025 this number is expected to reach 6.9 million unit sales by 2025. This growth prediction stems from various government incentives for EV owners. In fact, over 90% of U.S. states provide these offers for setting up EV charging infrastructure, and numerous states provide exemptions and incentives to accelerate EV adoption, including easier payment plans for purchasing EVs and exemptions from emission inspections in several states. The push for EVs is also seen in recent trends indicating that by 2025, mild hybrid EVs (MHEVs) and fully hybrid EVs ((FHEVs)) will dominate the EV market, with nearly equal shares. Battery electric vehicles ((BEVs)) are also expected to witness impressive sales during this period, driven by ownership incentives and advancements in charging infrastructure and state incentives.
Looking further into the future, by 2030, yearly sales of EVs are expected to jump to almost 5.6 million, accounting for over 32 percent of annual light-duty vehicle sales. These numbers indicate the significant shift towards electric vehicles, therefore making it crucial Tesla is able to support these growing numbers in order to maintain a leading position in the electric vehicle market.
Risks To The Thesis
While Tesla's expansion and dominance in the EV charging network have positioned themselves as a leader in the market, there are challenges Tesla will encounter.
As the demand for sustainable transportation grows, the EV charging market will become more competitive. As of now, there are over 900 EV charging companies worldwide. This sector is very attractive to investors, bringing in over $12 billion in venture capital funding since 2012, therefore fueling the creation of these companies. While Tesla currently leads in the U.S. with their Supercharger network, things may change as fuel stations and convenience stores contract with other companies. Tesla’s North American Charging Standard (NACS) has been accepted by major car makers including Ford, Mercedes-Benz, and General Motors, which could allow Tesla to gain a large influence on the EV market. However, the heavy reliance on a single company raises concerns about the regulation of pricing.
As mentioned earlier, Tesla expanding their chargers to other electric vehicles allows them to tap into federal funding for their public chargers. While this may lead to an increase in charging accessibility, there are also concerns about how regulators will control Tesla’s influence over the standard.
Takeaway
With the development of Tesla's Supercharger network, Tesla has set themselves up for a promising future in the electric vehicle charging market. With the charger’s strategic placement, increased accessibility and convenience, and high-speed charging capabilities, owning an electric vehicle has become much simpler. With the goal of blending everyday activities and vehicle charging, Tesla has created multiple solutions such as Destination Charging stations and home charging options,
Tesla’s approach extends beyond the sole focus of profit, but also prioritizes increasing the number of electrical vehicles on the road. This approach can be seen through their effort in expanding the use of their chargers to other electric vehicles. Along with that, Tesla has partnered with retail giants such as Buc-ee’s to improve consumer experience. Tesla’s approach, combined with their strategic partnerships have not only boosted their market value but also set new standards in the EV charging experience. They are building the next generation of gas stations in house and capturing the upside. Imagine this: what if Apple (AAPL) got paid every time someone charged their iPhone? I believe this is the level of opportunity we are talking about. For all these reasons, I believe Tesla, Inc. stock deserves a rating upgrade (strong buy).