This Move Could Make Tesla a Multibagger

Of all the challenges facing luxury electric-car maker Tesla Motors (Nasdaq: TSLA  ) , none are so daunting as a lack of infrastructure. Gas-powered cars have gas stations; electrics have washing machine outlets. Charging stations? Try finding one sometime.

So long as electric-car owners need to take extra steps to "fuel up," Tesla will have a hard time growing out of a niche market composed of early adopter enthusiasts and those with enough money to buy the status that comes with driving green.

Yet there are signs Tesla may be overcoming this obstacle via a novel revenue-generating strategy. Co-founder Elon Musk and his team are selling fully electric powertrain systems to Toyota Motor (NYSE: TM  ) . A new agreement with Daimler AG will bring electrics to the legendary Mercedes-Benz line.

So far, it's a small business. Powertrain development sales have brought in more than $85 million in revenue from 2010 through this year's first quarter -- not quite within spitting distance of the $148.6 million Tesla booked in auto sales last year.

While that equation won't reverse soon, there is a growth story here. The Daimler deal alone has the potential to turn powertrain development into much more than a side business:

"We recently signed an agreement with Daimler to create an entire electric powertrain for a new Mercedes-Benz EV, thus formalizing the joint effort kicked off in Q4 last year. This program is expected to exceed in value the sum of all powertrain agreements signed in Tesla history," Musk and Chief Financial Officer Deepak Ahuja wrote in Tesla's first-quarter letter to shareholders. (Emphasis added.)

Think about what this means. Do you really believe that Mercedes and Toyota would commit to building electrics without also committing to helping create an infrastructure to support fueling and maintenance of their vehicles? At the very least, both companies could encourage dealer networks to install charging stations -- which, in turn, could draw in profitable maintenance work. (Think tune-ups, component changes, wheel-to-wheel inspections, etc.)

To be fair, supplying dealers with charging stations is only a small step. Petroleum-fueled vehicles benefit from a national network of gas stations that refiners such as ExxonMobil (NYSE: XOM  ) have spent decades putting in place. Clean Energy Fuels (Nasdaq: CLNE  ) hopes to replicate this idea, but for natural gas vehicles. It'll take years and millions more worth of investment to see it through.

Tesla faces a similar issue with its electrics, and enlisting deep-pocketed partners to help solve the problem only makes sense. To my mind, generating revenue from the effort is an added stroke of genius -- and I've backed up my take with an outperform CAPScall on the stock.

I could be wrong, of course. Tesla also benefits from government subsidies, which means the forthcoming presidential election could change its fortunes every bit as much as it could affect the prospects of these four multibaggers in the making. What do you think? Weigh in below.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels and Tesla Motors. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (10) | Recommend This Article (15)

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  • Report this Comment On May 26, 2012, at 1:15 PM, Smorgasbord1 wrote:

    EVs don't need the same infrastructure as gasoline or CNG cars do, since EVs typically fill up at home overnight every night. For the biggest Teslas, that means you can go 265 EPA miles from home before needing a charge. That means the vast majority of trips will not need any additional charging while on the road. It also means a relatively small number of quick-chargers in strategic locations will suffice - orders of magnitudes less than gasoline or CNG stations need to be. It's a far easier problem.

    As for vehicle service while charging, I wouldn't put too much stock in that, either. There is no "tune-up" for electric motors, no oil to change, no fuel filters, etc. Regular scheduled service on Teslas is just once a year regardless of mileage. Mostly, while charging people will want to eat, use a restroom, or surf the internet (the latter can be done from inside your Model S during charging on the bigger than an iPad touchscreen). People may also shop, and there are opportunities to capture some impulse purchases there.

    That said, I agree there is a real need for Tesla to expand its service infrastructure, and that the deals with Toyota and Daimler will hopefully give that expansion a boost.

  • Report this Comment On May 26, 2012, at 3:03 PM, Cmorganson wrote:

    While infrastructure needs to improve, and it is, it does not need to mirror the saturation of the ICE infrastructure.  For example: When considering the average daily drive range for 90% of the population is approx. 29-35 miles per day (depending on the stat source), 90% of the infrastructure is already in place due to the fact that charging (for these distances) takes place at home.  Since the Tesla Model S can travel over 300 miles on a single charge, Tesla covers travel habits well above the average driving range.  In other words, Tesla is a viable car for over 90% of the population.  For travel longer than 300 miles, charging is currently readily available at a wide range of voltage/amperage through the existing campground (RV plug) infrastructure, which is vast.  Additionally, most driving routes of 300+ miles offer multiple RV plugin options. 

    As far as service, there really isn't much needed beyond a scheduled annual. The moving parts and maintenance is so minimum that it's just not comparable to the much greater needs of the ICE infrastructure, therefore it can be scaled quickly, as needed. Even Tesla brakes wear significantly slower due to the regenerative braking systems in the Tesla. 

    While infrastructure improvements are needed, it is simply not as urgent as it seems at a glance, and certainly NOT a reason to avoid a Tesla purchase.  Infrastructure will be developed based upon market saturation and can be effectively developed "as needed", quickly, and less costly than ICE infrastructure.

  • Report this Comment On May 26, 2012, at 7:13 PM, SuntanIronMan wrote:

    Nice article, Tim. Good read. As with all types of alternative fuel vehicles, it is the infrastructure that's the issue.

    I posted a little Fool blog article about this electric vehicle infrastructure topic yesterday and a company called NRG Energy that's building an electric car charging network:

    http://caps.fool.com/Blogs/innovative-electric-utility/73780...

  • Report this Comment On May 26, 2012, at 10:25 PM, cokenfries wrote:

    I think when a new way of doing things is introduced to the public folks try to understand it in terms of what they are used to. A lot of this discussion about the need for a charging network is sort of like folks saying a lot more water troughs are needed now that cars are being mass produced. As many others have pointed out, an infastructure is needed, but it will be vastly smaller and easier to construct than the fossil fuel equitvilant.

  • Report this Comment On May 26, 2012, at 10:53 PM, nonqual wrote:

    <<Do you really believe that Mercedes and Toyota would commit to building electrics without also committing to helping create an infrastructure to support fueling and maintenance of their vehicles? >>

    YES. It's clear Toyota's decision to order only 2,600 RAV4 power trains over the next two and half years is solely for compliance purposes in the land of fruits, nuts and flakes. That deal was UP TO $100 million--now it's looking like $65 million or less. How many rational customers want to pay more than twice as much for that vehicle just because it's an EV?

    If you listen to the exchange between the CFO and the Dougherty "analyst" on the last conference call, the new Daimler deal is in the order of $300 million over some undefined multi-year period.

    Tesla claims it will sell 5,000 S's per quarter in 2013. At about $70k/unit, that's $350 million/quarter, more than Tesla's expectation for the new Daimler contract over it's entire life!

    Tesla's future depends solely on being able to sell a sufficient number of Model Ss profitably after the EV enthusiast/early adopters get #@&*ed. They don't have enough cash to get to this time next year. Dilution with the forth coming third public offering is inevitable, the question is: What will it price at???.

  • Report this Comment On May 28, 2012, at 9:49 PM, Sudre wrote:

    I think this is a pretty accurate write up.

    I am purchasing a Model S and I make a 300 mile trip (600 mile round trip) at most once every couple of years. Sure I could take the gas car but I'd prefer to own one car for all my needs not several cars for each occasion. Living in the Midwest I really don't know if I will ever see any faster chargers (30-60 min charge) for years to come. That is going to turn away a huge group of people. For a car of this range one fast charger between most big cities and one in each big city would be a great start.

    If Tesla can make a deal with another vender to put chargers on their parking lots I think all fears will be put to rest. A deal with a restaurant chain would be icing on the cake.

  • Report this Comment On May 28, 2012, at 10:05 PM, bossman5000 wrote:

    Costco has been talking about getting in on the charging game. This stock won't be down for long.

  • Report this Comment On May 29, 2012, at 10:09 AM, boxxer55 wrote:

    The infrastructure comment is legitimate unless folks consider the Tesla S as a second or commuter car. I want to be able to drive to my in-laws house in Detroit (332 miles) without having to spend the night somewhere to "refill" my car or absolutely sweating the last 30 miles.

    Absent switching out the batteries (something one Israeli firm offers), there is going to be a time commitment from the owner to recharge. I view this as an opportunity for providers. Locations that offer high-speed recharging stations along Interstates will undoubtedly capture the bulk of EV and Plug-In Highbred stops. Stops that require an hour or so to recharge are going to be accompanied by shopping or eating or both. In theory, I could see this being very disruptive. I can tell you that I do not relish the idea of spending an hour or more at most of the truck stops along any of the routes I travel. Imagine discount malls or upscale strip centers replacing the traditional truck stop along Interstate routes. Such a concept would view the investment in electric charging stations as a draw and would likely be able to charge higher lease rates to retailers for just that reason, justifying and providing a reasonable return on the infrastructure thereby accelerating infrastructure buildout. Some malls around here already offer free charging stations for just this reason. It brings customers who plan to spend more time at the mall - and more time means more $$ spent. The last thought, unlike gas or nat gas, electric infrastructure is already in place everywhere. I may be wrong, but it seems much much simpler to me to build out charging infrastructure than any other fueling source.

  • Report this Comment On May 29, 2012, at 10:36 AM, SuntanIronMan wrote:

    @boxxer55

    NRG Energy is doing exactly what you are describing with their eVgo public charging network. Convenience Stations at retail locations (currently places like Best Buy, Walgreens, grocery stores chains). And Freedom Stations, stations bigger than Convenience Stations.

    http://beta.fool.com/whichstockswork/2012/05/29/nrg-energy-e...

  • Report this Comment On May 29, 2012, at 9:51 PM, willylowman wrote:

    In my eyes, the only obstacle at this point is perfecting the nanotube supercapacitor to replace the current battery. As this has been in the works under several permutations for years, I would anticipate production models in the near future. This would solve the problem of inconvenience waiting to charge as it would be nearly instantaneous, it would drastically reduce the cost of the energy reservoir as current batteries rely heavily on rare earths whereas the SC uses plain old carbon and the life cycle of the SC is practically unlimited. Rig an EV up with PV cells on the roof, hood and truck and the 300 days of sunshine I see a year while sitting at work 10 hours a day would make a nice dent in my commuter energy expenses.

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