Seeking Alpha
Long/short equity, deep value
Profile| Send Message|
( followers)  

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

To the casual observer, Tesla (NASDAQ:TSLA) and Car Charging Group (OTCQB:CCGI) may seem out of sync. Having just acquired bankrupt ECOtality's Blink Network assets, Car Charging now has the largest independently owned and operated network of public EV charging stations in the U.S. Tesla makes the very popular Model S, the only luxury EV of any consequence on the market today. With their industry-leading range of 200-plus miles, every day the vast majority of Model S's whoosh silently past Car Charging's public charging stations without stopping, having been conveniently charged overnight in a private garage.

If the story ended there, these two might never cross paths, let alone come to share a single future. Tesla, however, does not plan to remain just a luxury car maker. Elon Musk's vision is to democratize the EV by moving down market having mastered the luxury market. When he does, he will run into striking demographic trends that will necessitate a symbiotic relationship with Car Charging similar to that which Henry Ford had with Standard Oil.

Car Charging Needs Tesla

Today, Car Charging Group faces a classic development stage company's hurry-up-and-wait conundrum. With its bold acquisition of bankrupt ECOtality's Blink Network assets, it has secured a leading position in the new public EV charging infrastructure industry. Now, it can do little more than wait for demand to catch-up with supply.

Demand is of course a function of EV sales. The faster EV sales take off, the shorter the amount of time Car Charging has to spend on the bleeding edge. Though leading EV manufacturers have done an admirable job ramping up sales, Tesla is doing the most to compress Car Charging's time to profitability. It is doing this in two ways. First, by building a car that gives conventional internal combustion engine vehicles a serious run for their money, Tesla is expanding the market far beyond early adopters motivated by the EV's eco-friendly image and fuel economy. (Incidentally, it is also lighting a fire under the major auto manufacturers to build more appealing EVs, which would further stimulate demand.) Second, through establishing Tesla as a luxury brand, it is fanning the flames of pent-up aspirational desire in the middle market that it can leverage as it moves down market from its Model S and Model X to its planned mass market offering, the Model E.

In this way, Tesla is following in the footsteps of other brands that have leveraged niche market cachet into powerful mass market demand. Take Apple (NASDAQ:AAPL) for example. In the early days, only those who could afford to pay the considerable premium for an Apple laptop or desktop could access Apple's unique and covetable form factor. The rest of us settled for Dells and Gateways. Then, Apple started introducing a steady stream of lower price point products including the iPod, iPhone, and iPad. Pent-up demand in the middle market resulted in explosive growth as millions worldwide rushed to purchase a piece of Apple's cachet that while hardly cheap, was affordable enough for just about anyone. It may sound crass, but envy is the marketer's most powerful weapon. No doubt Tesla's new vice president of vehicle programs, former Apple vice president of Mac engineering Doug Field, knows this.

Though Tesla's Model E is still a few years off, sales of the Model S suggest that Tesla is expanding the market for the EV and speeding up its adoption. As the chart below illustrates, Model S sales have more or less kept pace with those of General Motor's (NYSE:GM) Chevrolet Volt and Nissan's (OTCPK:NSANY) Leaf, even though the Model S's MSRP of about $70,000 to $100,000 (depending on the options) makes its target market much smaller. This means that the Model S is getting better traction in the luxury market than the Leaf and Volt are getting in the much larger middle market.

If this up-take rate holds, Tesla stands to expand the middle market appreciably when it releases the Model E. That would put more EVs on the road faster, which would shave months or even years off Car Charging's time to breakeven.

Does Tesla Really Need Car Charging?

While it is apparent that Car Charging needs Tesla to expand the market and speed up adoption, it's less obvious that Tesla needs Car Charging. As stated above, the Model S's industry-leading range is more than enough to handle the typical daily commute and errands without having to stop to recharge away from home. If Tesla owners decide to take a long road trip, they will find free charging at strategically-placed proprietary Supercharger stations that will soon link every major destination in North America like modern-day Pony Express depots.

As Tesla moves down market with the Model E, however, it will run into a powerful demographic trend that will prove its sense of self-sufficiency to be short-lived. Since 2004, U.S. Homeownership has been dropping like a stone and is now at its lowest level since 1996 (see graph below).

Naturally, private garage ownership declines with homeownership. Though Tesla's current Model S and Roadster driving customers are affluent enough to have their own garages in which to install an EV charging station, this will be true of less and less Tesla owners as sales move down market. Car Charging's business model is focused on providing access to EV charging for the 35% U.S. households that can't install their own home charging solution (not exactly a small niche). It has laid the foundation for this by forging more than 87 strategic partnerships with multifamily residential and commercial properties, parking garages, shopping malls, retail centers, and municipalities to provide EV charging as an amenity where people live, work, and shop.


(Click to enlarge)

For Better or Worse, One Path

Considering the recent rise in correlation of the stock prices of Tesla and Car Charging, the market seems to foresee the two companies' futures becoming intertwined (see chart above). Since Tesla's listing on the NASDAQ in mid-2010, the two stocks have exhibited zero correlation on average. Since July, when a wobbly ECOtality foretold an industry consolidation around Car Charging, daily rolling price correlation has risen significantly. With the recent arrival of institutional money into the fold of Car Charging's investors by way of the Blink Network acquisition and CEO Michael Farkas hinting at an up-listing in the works in interviews and conference calls (page 13), it is reasonable to expect Car Charging's fate to be increasingly tied to Tesla's.

Sharing Tesla's fate will have its drawbacks. For example, Car Charging will have to take on the chin any knock-on effects from Tesla's failure to blow-out third quarter estimates, and the rather disconcerting news of yet another Tesla Model S fire. With a stratospheric run in the rearview mirror, anything less than perfection will be severely punished. To paraphrase Shakespeare, "the course of stock prices never did run smooth." The bottom line is it will take a string of missteps to undo all the things Elon Musk and company have done right, and Car Charging stands to benefit as the two companies continue to converge on the middle market.

Source: Meeting In The Middle Market: The Symbiotic Future Of Tesla And Car Charging Group