A number of observers, including my fellow Seeking Alpha writer Esekla, have made the observation that Tesla Motors (NASDAQ:TSLA) is more like a vertically integrated supplier than a traditional carmaker. Esekla even went so far as to compare Tesla to ExxonMobil (NYSE:XOM) in one of his posts.
This thesis actually makes a lot of sense if you look at Tesla's recent actions. The company's biggest project, the Gigafactory, is designed to produce enough lithium-ion batteries to store one gigawatt (one billion watts) of electricity. Elon Musk has even admitted that the goal of the gigafactory is to produce enough batteries each year to power 500,000 electric cars. The gigafactory can then be viewed as the equivalent of an oil refinery processing the fuel for final use by the vehicles.
Tesla Is in the Filling Station Business
Yet that isn't the only similarity to an oil company for Tesla; Tesla has also entered the filling station business. It is constructing networks of superchargers in North America, China, and Europe. Despite their fancy name, the superchargers are really filling stations for electric cars designed to recharge a battery in 30 minutes.
Like traditional filling stations, Tesla's superchargers are located at strategic locations on highways. The idea is to make it possible to take electric cars on road trips and to provide an infrastructure for electric cars similar to the one that exists for gasoline and diesel vehicles.
There's another reason why the superchargers make sense and one that has been ignored by electric-car fans. Last year The MIT Technology Review reported that a large portion of America's electrical grid simply cannot support electric cars. The juice needed to charge a Tesla is the equivalent of the electricity needed to power three homes. The residential power grid simply isn't built to handle that kind of demand.
Will Tesla Start Making Its Own Electricity
Tesla has taken two of the three steps necessary to becoming an integrated energy company. It is planning processing facilities-the Gigafactory-and building a distribution network-the superchargers. Yet it hasn't taken the third logical step: generating its own electricity.
After all, ExxonMobil and Chevron (NYSE:CVX) do not just refine and distribute petroleum products. They also drill for the oil and pump it out of the ground. If Tesla is to become like them, it'll have to start generating electricity.
Those that say this is unlikely are ignoring how unreliable the U.S. power grid is right now. The International Business Times just reported that America's aging electric grid now experiences more power outages than that of any of other industrialized country. If Tesla wants reliable sources of electricity, it'll have to figure out how to store or generate electricity at the superchargers.
The most logical method would be to install some sort of generating stations using a technology like fuel cells at the stations. The number of solar panels or windmills needed to power a supercharger would simply take up too much room because of low energy density. Fuel cells can run off of natural gas, which is readily available from an existing distribution network.
How Does Tesla Stack Up as an Energy Company?
So it is in Tesla's interest to become a vertically-integrated energy company. This, of course, raises an interesting question: how does Tesla compare to other vertically-integrated energy companies?
On June 30, 2014, Tesla reported a TTM revenue figure of $2.436 billion, a free cash flow of $-179.26 million, and a quarterly debt to equity ratio of 2.479. On August 15, 2014, Tesla had a market cap of $32.65 billion and an enterprise value of $32.36 billion.
On June 30, 2014, ExxonMobil reported a TTM revenue figure of $441.65 billion, a free cash flow of $1.66 billion, and a quarterly debt to equity ratio of .1201. On August 15, 2014, ExxonMobil had a market cap of $422.33 billion and an enterprise value of $444.99 billion.
On June 30, 2014, Chevron reported a TTM revenue figure of $225.86 billion, a free cash flow of -$1.05 billion, and a debt to equity ratio of .1527. Chevron also had a market cap of $239.46 billion and an enterprise value of $249.93 billion.
Even a much smaller energy company like ConocoPhillips (NYSE:COP) reported a TTM revenue figure of $60.20 billion, a free cash flow of -$624 million, and a debt to equity ratio of .3839. ConocoPhillips had a market cap of $99.13 billion and an enterprise value of $114.3 billion on August 15, 2014.
These figures show us two things. First it makes a lot of sense for Tesla to transition to an energy company. Energy companies make a lot of revenue, and they have very little debt, which is a better situation than Tesla is in. Second Tesla does not have the resources to compete directly with the oil companies -which would seem to be Musk's business plan.
Tesla Business Plan: Mountains of Debt
Tesla bulls would tell us that their favorite company will someday produce the kind of gigantic revenues seen at ExxonMobil and Chevron. Yet it will take vast expenditures to reach even a fraction of that size.
The Gigafactory alone is projected to cost $5 billion, to be paid for by convertible bonds, $2.5 billion of which have already been issued. We haven't even seen the bill for the supercharger infrastructure yet, but I imagine it will be even greater, particularly if Mr. Musk has to start generating his own electricity.
To become a vertically integrated energy company, Tesla will have to take on vast amounts of debt. Paying off that debt will require the kind of revenues the oil giants generate. Since there's no guarantee that Tesla will ever make that kind of money, we can see the kind of risk its investors are taking.
Tesla shareholders are certainly buying into a bold and imaginative dream, but the company's business plan isn't for the faint of heart. The potential rewards are vast, but the risks could be even greater.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.