Tesla: Recharging Its Evaluation

Aug.23.13 | About: Tesla Motors (TSLA)

In my previous article I discussed Tesla's (NASDAQ:TSLA) advantage over competitors, as well as current and future financial positions. One of the biggest drivers in Tesla's portfolio is its Supercharger network. At the current margin it would require Tesla to sell 2.8 million vehicles (nearly a century at the current production rate) to break even with the current evaluation. One of the best ways to create shareholder equity is by expanding its user base and generating perpetual revenue (through services) - and the key is the Supercharger.

Tesla has the idea to create a series of solar paneled charging stations throughout the USA and parts of Canada. Tesla allows all 85 kWh and upgraded 60 kWh to recharge at their stations which are planned to look like this:

(click to enlarge)Click to enlarge

Tesla covers all costs related to the Superchargers, including the maintenance and energy, and receives 4 - 5 parking spots and 200 - 600 square for the supercharger station equipment - it costs Tesla roughly $100,000 - $175,000 to install a Supercharger station. In return, the parking lot owner receives the "image benefits" associated with the Tesla brand, and is locked in with a 5 - 10 year contract.

Tesla has recently signed a deal with CBL & Associates Properties (NYSE:CBL) to open 5 Supercharger stations in malls across Florida, North Carolina, Illinois and California. Tesla has plans to open 27 Supercharger stations by the end of the summer, expanding their reach. The problem is that they don't look like the ones in the image above, and don't even have a solar canopy. Most look like:

(click to enlarge)Click to enlarge

Even if they don't have a solar canopy they can still fulfill Tesla's goals.

What is the point of Superchargers? Tesla has previously announced that it will not charge for supercharging, but instead charge for a premium service called "Battery Swap." Elon Musk always intends to allow Tesla owners to charge their cars for free at a Supercharger (takes around 30 minutes to recharge half), but it will cost owners $60 - $80 to use "Battery Swap," which takes just 90 seconds to replace the old battery with a fully charged new one. Once a driver "Battery Swaps" he can borrow a battery (or buy a new one) where he needs to return it on his trip back. The Supercharging network is a strategy to promote Tesla and electric cars, allowing customers to travel more than their 208 - 265 mile range.

Is this a good strategy? Tesla is currently producing around 500 vehicles a week, delivering up to 40% to Europe (and soon to deliver to Asia). Tesla has large amounts of interest in its cars, with the only doubts coming over their batteries and range. By creating a national network of Superchargers, Tesla is fixing the one doubt in consumers' minds. For the time being, Tesla doesn't need to convince consumers, but it is thinking ahead. By creating a national charging network (that costs it only a few million) when competition gets harder it will still have a large advantage.

The downside... Tesla is only creating the charging network in the US and Canada, meaning that its European and (soon to be) Asian customers will not have the same infrastructure. Once more, not all the Supercharger networks have solar canopies, which means Tesla will have to pay for electricity. The reception of Tesla in the USA has been spectacular, and Tesla is trying to keep it going. As for the European and Asian markets, Tesla is still trying to asses demand.

The solution... Even if only a few of Tesla's Superchargers have a solar canopy, Tesla will be able to sell the electricity back to the grid which will help cover costs. I thought that it would be a good idea for Tesla to allow other cars (Nissan Leafs, Chevy Volts) to charge at their stations. At the current point in time, Tesla has a special charging system that only its cars can use. In the future, Tesla can license the superior technology to other manufacturers, and obtain exclusive rights to charging stations.

At the moment, Tesla is trading at extreme evaluations that will take years to obtain. Tesla is creating solutions to help create value and sell more cars (at higher margins). Tesla needs to sell a million vehicles just to justify half of its evaluation - but investors can also see the potential. A million vehicles might be on the low end for Tesla in the coming years, as it revamps production and prove its superiority over regular vehicles. The time has come to make a choice.

Tesla has a special opportunity, controlling the high end electric vehicle market, and expanding into lower segments. With a revamp in production and a national supercharging network, Tesla has the potential to zip ahead in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In my previous article I took a bearish stance on Tesla (though I recommended not to short it), but since then I have realized its potential -- $19 billion is a good price to pay for the exposure and potential Tesla has in the electric vehicle market.