RIVN - Tesla's Charging Deals: Some Win Some Lose

2023-06-21 11:12:27 ET

Summary

• Tesla has crafted deals with Ford, General Motors, and Rivian, allowing their electric vehicle customers to use Tesla's supercharger network.
• The deals could increase Tesla's revenue and reduce tech risks, but may also negatively impact sales due to the loss of an exclusive selling point.
• Non-Tesla charging infrastructure companies, such as Electrify America and ChargePoint, may face increased competition and headwinds due to these deals.

Article Thesis

Tesla, Inc. ( TSLA ) recently crafted deals with General Motors Company ( GM ) and Ford Motor Company ( F ). The deals make sense for the involved parties, although Tesla may also experience some disadvantages. On top of that, there are many other companies that could be affected. In this article, we will take a look at who benefits and who could be negatively impacted by the deals Tesla has crafted with its two American legacy competitors.

What Happened?

Tesla had announced in the past that it would open up its charging network for competitors eventually. This has now formally happened, as Tesla has announced two separate deals with Ford and General Motors. These deals will allow the customers of Ford and GM electric vehicles to use (some of) Tesla's Supercharger network , i.e., its in-company charging infrastructure. Seeking Alpha's coverage of the two deals is available here (Ford) and here (General Motors). Just on the day I write this, Rivian Automotive, Inc. ( RIVN ) also joined the charging alliance, although we have not gotten a lot of news about how this will play out exactly -- the expectation is that Rivian owners will be able to use around 12,000 superchargers.

What This Deal Means For Tesla

At first sight, one could easily say that this will undoubtedly be good for Tesla. After all, Tesla will be able to monetize users of competitors' products, at least to some degree. When a Ford or Cadillac owner uses a Supercharger for charging, Tesla will make some money from that. And that surely will be a nice little tailwind for Tesla's profits, although investors should know that Tesla makes the vast majority of its profit with vehicle sales -- all other business units, including the supercharger network, contribute a very minor profit. When Tesla's Supercharger network is opened up for additional consumers, profits should climb, but likely not in a massive way. "Services and others," which includes Tesla's Supercharger network, contributes less than 10% of company-wide revenue. Even if that revenue were to double over the coming years due to the deals that Tesla has crafted (I think this is a rather bullish estimate), the overall impact on Tesla's company-wide sales wouldn't be massive.

Tesla is priced for considerable revenue and profit growth over the coming years, and the majority of that growth will have to come from its vehicle business (or, potentially, its autonomous vehicle business, in case Tesla ever manages to hit its goals). Some analysts estimate that this deal could add $3 billion per year in revenue eventually -- if Tesla were to hit a 10% profit margin, that would make for $300 million in additional net profit. That surely is nice, but for a company the size of Tesla, it's not too impactful.

The deals will thus add some revenue and profit for Tesla, but the deals most likely won't be a game-changer -- Tesla is and remains very reliant on vehicle production and sales.

However, the deals have another advantage for Tesla. When more and more competitors agree to use Tesla's charging tech, including its NACS charging standard, then this diminishes an important risk for Tesla. If its competitors were to cooperate and push a different charging standard, Tesla would risk potentially being left behind tech-wise. But with competitors opting for Tesla's NACS standard, this risk is gone. It's hard to quantify this risk, but I believe that it is pretty clear that this risk being gone is positive for Tesla.

There is a potential headwind as well, however. Tesla's Supercharger network is vast -- at least relative to the charging competition, not relative to the infrastructure that is available for internal combustion, or ICE, vehicles. Tesla's charging network likely played a role in the purchasing decisions of some EV buyers in the past. Those that wanted to have access to the most relevant charging network opted for a Tesla, which most likely helped Tesla sell more EVs than the competition in North America. But with the supercharger network being available for those that own a Ford, Rivian, and so on, this unique selling point is gone -- consumers can now buy from different brands and they will still be able to access Tesla's charging network. Some consumers that would have opted for a Tesla vehicle in the past, due to putting a lot of value on Supercharger access, could now switch to the product of a competitor, while still being able to charge their Ford, Rivian, etc. at Tesla's charging stations. In some sense, the loss of Tesla's USP could thus cause lower sales volumes, all else equal. It is not possible to know how large this impact will be in the long run, but Tesla losing its important charging USP can't be positive for Tesla's sales performance.

All in all, this deal could thus impact Tesla positively or negatively. Some profits from offering charging services to the owners of competitors' products will be a nice little tailwind for Tesla, and the tech risk being gone is positive as well. On the other hand, Tesla could be negatively impacted by losing a core selling argument (exclusive access to the largest charging network). Overall, I think this deal is neutral or moderately positive for Tesla.

What These Deals Mean For Other Players

Winners

Starting out with Tesla's competitors that have crafted these deals with Tesla, they seem like clear winners. The deal does not hurt them in any way but provides a clear additional selling point for their own electric vehicles. In the past, Ford's customers weren't able to charge at Tesla's stations. This hurt Ford's ability to sell vehicles, as some EV buyers were unsure about relying on the charging infrastructure from companies such as Electrify America. Now, Ford can advertise that Ford buyers will be able to charge at Tesla's vast Supercharger network -- a nice incentive for EV buyers to opt for a Ford, at least relative to the past, when a Ford was a comparatively worse investment due to no access to Tesla's infrastructure. The same holds true for GM's brands and for Rivian, and other EV players that might forge deals with Tesla in the future. Due to being able to offer much-improved access to charging infrastructure now, I believe that the new partners of Tesla will be winners following these deals.

Elon Musk's vision of driving the electrification of the automobile industry should also see a boost following this deal. While Tesla's shareholders do not benefit from an improved EV sales outlook for Ford, GM, and so on, Elon Musk has come a little closer to his vision of electrifying all automobiles.

Losers

Charging infrastructure players that aren't Tesla should feel headwinds from these new deals. Companies such as Electrify America, EVgo, Inc. ( EVGO ), ChargePoint Holdings, Inc. ( CHPT ), Blink Charging Co. ( BLNK ), and Wallbox N.V. ( WBX ) could be negatively impacted by this development. After all, when Ford drivers, for example, charge their vehicles at one of Tesla's chargers while on the road in the future, they won't charge at one of the chargers of these EV infrastructure companies. For non-Tesla vehicles, which did not have had the option to charge at Tesla's superchargers in the past, this deal has added to the charging competition.

Since EV infrastructure is a capital-intensive business where margins aren't especially high for now, increased competition could result in further pressures on the bottom lines and cash flow outlooks for these companies. Some, such as Wallbox, have stated that they could add NACS chargers. But still, the added competition from Tesla's Supercharger network seems like a clearly negative development for all non-Tesla charging infrastructure players.

While Tesla as a company could benefit, and while its shareholders could benefit as well, Tesla drivers could be among those that are negatively impacted by these deals. After all, they will have to share the existing Tesla Supercharger network with more drivers in the future. In the past, especially at peak travel times, there have been cases of long queues at Tesla's superchargers. If Fords, Rivians, and so on are waiting in line in order to charge at these stations in the future on top of the existing Tesla driver base, queues could become even longer. It wouldn't be surprising to see some Tesla drivers being unhappy about this development.

EV companies that have no access to Tesla's Supercharger network could lose out as well. Potential EV buyers might prefer to buy an EV that can be charged at Tesla's Superchargers, even if they do not want to own a Tesla -- Ford, Rivian, and GM could thus gain market share from other EV players. This news could thus be important for Mercedes ( MBGAF ), BMW ( BMWYY ), Volkswagen ( VWAGY ), Stellantis ( STLA ), Toyota ( TM ), Kia Motors ( KIMTF ), and so on.

Is Tesla A Buy Following This Deal?

Tesla's services business gets a boost from this deal, and over the years, several billions of dollars could be added to the company's top line. That would be massive for a small company, but Tesla is pretty large already and trades at a hefty valuation of more than $850 billion. When these deals add a couple of hundred million dollars per year to Tesla's bottom line, that's nice for sure, but hardly a game changer. The deal helps de-risk Tesla tech-wise, which is nice, but on the other hand, Tesla loses a unique selling point -- this could be positive for its competitors that have crafted deals with Tesla, such as Ford and GM.

It's pretty clear that the EV infrastructure players -- Tesla's charging competitors -- will be negatively impacted. But due to profitability issues, many of these didn't seem like especially attractive investments before this deal, either, I believe.

Tesla has its qualities for sure, but its stock is also very expensive. At close to 80x net profits, Tesla is priced for perfection. It remains to be seen whether its price-cutting strategy works out in the long run -- at least for the moment, it results in clear profitability headwinds. Tesla's profit margin has been declining in recent quarters, and we don't know yet when that trend will stop.

For me, Tesla stock is too expensive for an investment right now, especially due to the question marks around its future margins and price-cutting strategy. The charging deal, while likely positive for Tesla, is not big enough to make Tesla a buy at the current (very elevated) valuation. Analysts seem to agree with that, as the consensus price target of just above $200 implies substantial downside potential for Tesla, which is currently trading north of $270 per share.

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