Why The Supercharger Network Is A Great Investment For Tesla

| About: Tesla, Inc. (TSLA)
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Last week, I wrote about some of the reasons why I think Tesla (NASDAQ:TSLA) may have a lot of upside in the next year. Even though the stock has tumbled in the last week (which doesn't really shock me), the company has given me more reasons to have a positive outlook on the long term. Last Thursday (May 30th), Tesla held a conference call to discuss the expansion of its supercharger network. Although it was not as widely publicized as some of the previous announcements, it still gives investors some signals as to the future.

The Supercharger system lets Tesla owners charge their cars for free for life along major routes. In case you missed it, here were some of the key highlights

  • Accelerated rollout of supercharger stations. Approximately 200 supercharger stations planned in North America (8 exist now).

  • By fall 2013, the entire eastern and western seaboards as well as other major metropolitan areas will be covered.

  • By winter 2013, coast to coast travel will be possible along the I-80.

  • By 2015, 98% of the U.S. and southern Canada will be within range of a supercharging station.

  • Among densely populated areas, the average between stations will be approximately 80 miles.

  • In addition to expanding the number of stations, the number of ports per station will also be increasing. We will probably end up somewhere around 10 ports per station.

  • The max charge rate will be increased to 120kWh from 90kWh.

  • You can get a two-thirds charge in approximately 20 minutes, about twice as fast as previously. This is about 3 hours of drive time.

This represents a substantial investment for Tesla. After the company's secondary offering last week, it had over $500 million in cash lying around. A supercharger station costs about $150k without solar installed, and $300k with solar installed. Not all supercharger stations will initially have solar upon opening, but the plan is to gradually rollout solar. So over 2015, this will represent capital expenditures of 200 x $300,000 = $60 million.

By incorporating solar, however, the stations should produce enough power to sustain themselves, so the costs of running them should be relatively small. (The stations should net produce more energy than they source most of the time, except for popular travel times like Friday or Sunday afternoon. The use of supercharger stations is not constant throughout the week as some articles suggest.) While leasing the space may cost money, Supercharger stations attract upper class clientele to the area, so perhaps they could cut a deal on that.

And for a company that just raised a billion dollars in a secondary offering, it actually doesn't seem like that much money.

Several other small details about how the supercharger stations will work were revealed. Tesla actually has grid storage of electricity at select supercharger stations right now, with plans to eventually rollout solar and grid storage to all stations. As Elon Musk joked, if there is a zombie apocalypse and the power grid goes down, you will still be able to drive across the country for free in a Model S. And by tapping a lightning bolt on the screen, you will automatically be routed to the nearest supercharger station on your route; you don't have to worry about searching for stations on your phone or looking up rollout dates.

While this may be exciting for Tesla owners and investors, I don't think that this will materially affect Tesla's earnings or revenue for at least several years. When asked on the conference call about how reducing the range anxiety will impact sales, CEO Elon Musk responded that he doesn't think it really will, at least not right now. Many Model S buyers may not even know supercharging exists.

But I do think the supercharger station network will prove to be an incredible advantage in three to five years, around the time Tesla puts out a low cost car around $30k that can appeal to the masses. After all, Tesla's sales volume is still low, most buyers are Tesla's most loyal fans, who would don't need convincing that electric cars are viable solutions. But to become a major player in the auto industry on the same level as a GM (NYSE:GM) or Ford (NYSE:F), the market for EVs needs to expand hugely.

Making long distance travel in an electric car viable is a big part doing that. If the major concerns keeping people from getting EVs are performance, price, and range anxiety, it seems that in 3-5 years, Tesla will have eliminated all those concerns. Its cars by all accounts perform great; future models will have lower price points; and the supercharger network, with a density of stations at least every 80 to 100 miles, should go a long way to reduce range anxiety. Check, check, and check.

Imagine the competitive advantage if Tesla is the only electric car maker with a supercharger network established in 2015 or 2016. For a consumer choosing between a Gen III from Tesla for $35k versus a Nissan (OTCPK:NSANY) Leaf or Chevy Volt for closer to $20k or $25k, the access to free charging at supercharging stations for life and the freedom to take road trips without range anxiety might be the difference maker. If you want to travel across the country in an EV, it's the Tesla way or no way. It may be hard to put a number on the additional revenue from supercharger stations, or the impact on profit margins, but this alone should give Tesla an enormous advantage in capturing EV market share. Even if other EV makers eventually catch on, Tesla will already have a huge first-mover advantage.

And consider this: when asked about the possibility of other car makers using the supercharger network, Elon Musk seemed potentially open to the idea. But that would require other car manufacturers licensing Tesla's battery technology. You can't just make any battery and plug in 120kW of direct current and expect things to work; the battery and charger have to be designed to work together. If the market ended up playing out that way, with other carmakers licensing Tesla battery technology and paying for supercharging station access, it would seem to be a huge advantage for Tesla. An advantage sort of like owning all the gas stations, and the technology that allows cars to use them. But of course, that idea is still just speculation.

Tesla's stock price is not likely to be greatly affected by the supercharger expansion in the short term. But investors should stay tuned to how other players in the EV industry react (or don't react) to Tesla's plans. Tesla's supercharger expansion is likely to both increase the market for EVs and give Tesla a material competitive advantage to capture more of that market share. Accordingly, investors should look to growth in those areas as indicators of what is in store for the future of Tesla. It is my view that by differentiating Tesla cars from any other EV and reducing range anxiety, the supercharger network should gradually be well worth the investment for the company and for shareholders. I see the stock going quite a bit higher by 2015 or 2016 as Tesla's advantages build up.

Disclosure: In my last article about Tesla, I was long. I have recently lost my position to a stop-loss order, but expect to be long again soon. 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.