$1.2 billion a year.
According to analyst Gary Black, that’s how much Tesla’s (NASDAQ: TSLA) most recent price cuts will cost the company. And he’s concerned.
Black, who is also the managing partner at the Future Fund, which boasts $136 billion in assets under management, has also been critical of the company cutting prices instead of spending on traditional advertising campaigns.
However, while I’m sure Black is a far more successful investor than me, his criticisms are flawed.
Uncle Elon doesn’t spend money on traditional advertising campaigns because for a company like Tesla, it would be a massive waste of money.
The company doesn’t need brand recognition. It has plenty of that.
And the quality and safety of its vehicles are so widely known there’s no reason to spend millions of dollars to convince the masses of these truisms.
But that’s not the main reason Black’s analysis is flawed.
That reason is directly tied to the fact that Black doesn’t fully understand Tesla’s long game.
You see, Tesla isn’t just a car company. It’s now a “fuel” company too. Our analysts have traveled the world over, dedicated to finding the best and most profitable investments in the global energy markets. All you have to do to join our Energy and Capital investment community is sign up for the daily newsletter below.
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Tesla’s $20 Billion Profit Center
A few months ago, Wedbush Securities analyst Dan Ives put out a note that took a lot of Tesla bulls by surprise.
He wrote that Tesla’s Supercharger network will generate as much as $20 billion in yearly revenue by 2030, or roughly 6% of the company’s total revenue.
That’s not pocket change, and it’s far more than the $1.2 billion Tesla could lose due to these recent price cuts.
Truth is, while Tesla continues to cut prices, it’s also continuing to expand its Supercharger network, which is the only global DC fast-charging network in North America.
While the company’s Supercharger network and technology were initially only intended for Tesla customers, they have since been adopted by other carmakers, including Ford (NYSE: F), GM (NYSE: GM), Honda (NYSE: HMC), Hyundai (OTCBB: HYMTF), Jaguar, Kia, Nissan (OTCBB: NSANY), Mercedes-Benz (OTCBB: MBGAF), and Volvo (OTCBB: VLVLY).
Stellantis (NYSE: STLA) and VW (OTCBB: VWAGY) are currently in discussions with Tesla to get in on this action too, and charging network companies ChargePoint (NYSE: CHPT) and Electrify America also have deals in place with Tesla.
Ives opined on this, writing:
We view this as another strategic move by Musk & Co. in the long-term story as the Supercharger network is a large monetization opportunity with the company now taking more market share in the charging network ecosystem domestically while laying the foundation for a successful EV transformation over the next decade.
Tesla will continue to pump out the most sophisticated and technologically superior vehicles on the market, but even at a discount that will squeeze margins, Moneyman Musk will more than make up for it with charging revenue.
To compare this with the early days of internal combustion, think of Tesla as not just a carmaker but the “Standard Oil” of the EV market, which, as you know, will essentially be more than 50% of the new car market in less than seven years.
It almost makes you wonder if Tesla vehicles will essentially become loss leaders.
Say Tesla eats $5,000 when it sells a Model Y but then generates about $1,000 per year from that Model Y using its charging stations. The average car owner in the U.S. keeps his or her vehicle for eight years. So playing the long game, would Tesla end up generating more revenue by cutting the price of its cars and making it up on the back end with the charging stations?
Couple that with the nearly dozen other carmakers that will be using Tesla’s charging stations and technology, and Tesla basically uses its extensive charging network as a profit center.
It’s actually quite brilliant, as long as you understand that Tesla is playing the long game here.
And that’s not just true for Tesla.
There are a number of electric vehicle companies that are actively developing new technologies that will help support that proliferation of electric cars over the next 20–30 years. Those are the companies to watch closely.
Take this solar company, for instance, which has made a new kind of solar panel designed specifically for electric cars.
These panels are so strong and durable they can power a 2-ton vehicle.
In fact, one electric car startup is now using this company’s solar panels to power its new electric car that can travel up to 1,000 miles before needing to “refuel.”
That’s what I’m talking about when I say next-generation electric vehicle technologies will be worth far more than the vehicles themselves.
So yes, perhaps Tesla’s margins may be feeling the sting of these recent price cuts, but Tesla’s larger vision of not only making these cars but also fueling them is why Tesla will continue to be the most successful car company in the world.
Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.
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