Tesla (NASDAQ:TSLA) has often been called an “iPhone on wheels.” I haven’t talked to Tesla CEO Elon Musk about how he feels about this comparison to Apple (NASDAQ:AAPL). But I would imagine his feelings on the topic are mixed. Comparisons aside, TSLA stock has undeniably benefited from the company’s great success over the past few years. And now it’s set to benefit further from a new, un-Apple-like move.
Musk recently announced that Tesla would open its Supercharger network to other electric vehicle (EV) suppliers later this year. Keep in mind that this network currently consists of nearly 3,000 stations and 27,000 connectors worldwide.
Tesla’s exclusive Supercharger network has always been a selling point for the company. But, for Musk, whose goal is to “support the advent of sustainable energy … not to create a walled garden and use that to bludgeon … [his] competitors,” proprietary networks run contrary to this ideology.
Musk’s strategic move to open up his network to his competitors, is important — in a few ways. First, it’s a big boost for the nascent — but growing — EV market. There’s a subtle irony in the reality that, once Tesla’s competitors start shipping real vehicles, those “Tesla killers” will likely power up at Tesla charging stations. Opening up the network could also be a powerful marketing tool for a company that famously doesn’t spend money on traditional advertising.
Sure, Tesla wants to promote good things for the environment. But this announcement is also very strategic. Tesla has been quietly securing its leadership position through cost efficiency. (For further evidence, refer to the company’s expanding margins reported earlier this week). By increasing use of its Supercharger network, Tesla can reduce its own costs and lower charging prices for customers. It can also make its own network more profitable. These profits can then be used to grow the network faster.
Economies of scale.
Of course, all of this is good news for TSLA stock moving forward. Here’s a closer look at Tesla’s open Supercharger network strategy and how it helps cement Tesla’s already dominant position in the EV market.
TSLA Stock and Impact of an Open Charging Network
Lucid Motors (NASDAQ:LCID) CEO Peter Rawlinson can’t be happy. The rise of competitive charging networks has always been an important factor for anyone considering a non-Tesla EV. If Tesla owns the biggest, fastest, lowest cost charging network, well … that’s a problem (if you’re not Tesla). Even though Lucid Motors claims its (still-to-be-manufactured) cars hold a better charge, those cars still need to charge somewhere.
But it’s not just Lucid that should worry. Almost a dozen open-charging networks like EVgo (NASDAQ:EVGO), ChargePoint (NYSE:CHPT) and Blink (NASDAQ:BLNK) have recently gone public. Each of these plans to use much of that fresh cash to expand their networks. But unlocking the Supercharger network to owners of other EVs erodes their competitive advantage. Tesla would immediately alleviate the headache of finding available (and working) chargers. It would do so all while reducing time spent charging. That’s probably why, EVgo noted in a recent SEC filing that Tesla opening up its Supercharger network “could further reduce demand for charging at our sites.”
The Network Effect
Tesla’s Supercharger is a 480-volt direct current fast-charging technology. This faster charging time has always given the company a competitive edge. Meanwhile, other carmakers have formed alliances or invested in startups for networks as they rush to get their new EVs to market.
To date, competing charging networks lack scale. Electrify America, the charging network for Lucid Motors, is the closest rival to Tesla’s Supercharger network, with 435 charging sites in operation and over 100 sites in development. Meanwhile, ChargePoint claims a global count of over 30,000 charging points. On the surface, that looks much bigger than Tesla’s network. But it’s important to note that less than 400 of these stations are DC fast-chargers, whereas all of Tesla Superchargers are DC fast-chargers.
Tesla’s DC-fast charging network is not only several times bigger than ChargePoint’s but also faster, better located and has more stalls per location. There are currently 929 Tesla Supercharger stations in the U.S. according to the U.S. Alternative Fuels Data Center.
Something that went unsaid: Tesla’s open superchargers could appeal to government subsidy programs. Notably, President Biden has said he wants to build 500,000 charging stations as part of a $15 billion investment in the technology.
How Dynamic Pricing Might Solve the Overcrowding Issue
Tesla’s plan has at least one big potential hang-up, though: capacity (i.e., how crowded the Supercharger network might get). Access to a large, exclusive network of fast charging stations has long been one of Tesla’s selling points. Yet, as Tesla’s vehicles have become more popular, Supercharger stations in some big cities have become crowded.
In a way, that’s good for Tesla (and, by extension, TSLA stock). Hanging out at a Supercharger is a great way to meet other like-minded Tesla owners. This community, in turn, helps grow the company’s legion of devotees and brand. After all, that’s what “LucidNation” does at the company’s fancy showrooms. But waiting in line only to wait again while charging isn’t fun. And things could get less fun if the Supercharger network gets more crowded.
To solve the usage problem, Musk said Tesla may play with dynamic pricing. The company would charge based on charging speed and traffic at certain stations to encourage shorter charging sessions. So, EVs that charge more slowly than a Tesla (and thus occupy the charging station longer) should pay more. As Musk notes, “the biggest constraint at the Supercharger is time.” Tesla could raise the price per kilowatt-hour during peak periods to manage use. Tesla will also continue to expand network capacity, increase charging speeds and further improve trip-planning tools. All of these moves will help bolster the longer-term case for TSLA stock.
Economies of Scale
Which ever way Tesla comes out on network pricing, one thing is clear. The move is an important way for the EV giant to further extract cost efficiencies. Drew Baglino, Tesla’s SVP of powertrain and energy engineering, said it best: “Increasing the utilization of the network actually reduces our costs, which allows us to lower charging prices for all customers, [and it] makes the network more profitable … [allowing] us to grow the network faster.”
EV competitors are certainly taking notice. Lucid, after all, for all its talk of disruption, is following Tesla’s playbook. The company is breaking into the market by first offering a premium product. That should hopefully bring better margins while the company works toward more operating leverage and scale.
Tesla’s trajectory proves its competitors have a long, painful road ahead. That’s good news for TSLA stock investors.
Reader Question of the Week: Does Anyone Care About Fundamentals Anymore?
From a response to the article “The Silence of the Bears: Tesla Q2 Earnings Results Bolster the Buy Case.”
“Is it not true that Tesla’s market cap of around $660 billion is close to the total size of the U.S. and European automotive markets, even though it’s only a minor player overall? Is it also not fair to say that given this fact, valuations are completely inflated based on traditional fundamentals?
I enjoyed your article and agree with a lot of what you said but I am coming to the realization that every day retail investors and big institutions like Cathie Wood are not using the traditional fundamentals anymore. This is driving stock prices of Tesla and other tech companies, some of which won’t have a product for years. I’m just wondering if maybe it’s time to trade on what revenue for these companies will look like five years down the road as it seems everyone else is doing that.”
Yes! Thanks for noticing! It’s true that valuations, particularly in the EV space, have become disconnected from their fundamentals. But just because the herd is moving in one direction doesn’t mean you have to follow. Sometimes fundamentals lag investor sentiment. But, eventually you’ll want to know how exactly much you’re paying for that good growth story. My two cents: do the math and stay the course.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
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