Elon Musk finally came out and admitted something that I’ve been saying for a while; Tesla Motors (NASDAQ: TSLA) is in the filling station business.
The electric-car maker will probably charge owners of its upcoming Model 3 Sedan to use his network of superchargers, Musk revealed at Tesla’s May 31 shareholders’ meeting. The billionaire did not say how much owners will pay for juice, but he finally admitted that giving energy away is a lousy business plan. Bloomberg reported that he also made some very revealing remarks.
“Free Supercharging fundamentally has a cost,” Musk admitted. “The obvious thing to do is decouple that from the cost of the Model 3. So it will still be very cheap; and far cheaper than gasoline, to drive long-distance with the Model 3, but it will not be free long distance for life unless you purchase that package.”
Power from the superchargers is currently free for Tesla owners; and very much a loss leader for the company. That’s not a very smart policy for a company; that reported a net income of -$1.02 billion on March 31, 2016.
Why Filling Stations will Want to Add Superchargers
As I noted back in December 2014, Musk was ignoring a very important source of revenue at them. He was not selling anything at his filling stations. News reports and pictures indicate that they do not have vending machines.
Most filling stations in the United States make a great deal of their revenue from the other stuff they sell to drivers: such as pop, coffee, chips, lottery tickets and cigarettes. The ones on long-distance highways also make money from takeout food. By charging for electricity, Musk opens the door to sell other things at the Superchargers.
Charging for electricity will also make it easier to sell superchargers to filling station operators. Filling-station operators will want to add supercharging; because they figure the electric car driver might come in for a drink and a lottery ticket, while her vehicle is charging up.
How Tesla could Make Money from Its Competitors
This will reduce the risk that filling station owners will take by giving them a possible revenue stream; in the form of electricity charges. Electricity could be a great deal for filling station owners because they will not pay trucks to deliver it, instead it comes in through the grid; or gets generated on site.
Tesla gets another potential source of income here ;because it can sell supercharging equipment to filling station operators. That means it can expand its network without building the stations. It can turn a loss leader into a potential source of revenue.
Yet another stream of revenue that Tesla could tap here is all the other electric cars that will be on the road in the next few years. Several carmakers have big electric plans; including Volkswagen (OTC: VLKAF) which is building its own giant battery plant to compete with Tesla’s gigafactory, and Ford (NYSE: F) which is planning to spend $4.5 billion on electric vehicles.
Revenue Sources Tesla can tap at the Superchargers
This means that Tesla could be in a position to make money from its competitors. This gives rise to four potential revenue streams for the company; three of which I have already touched upon. These streams are:
- Tesla can sell electricity to drivers of other brands of electric cars. Since some of these brands have far greater manufacturing capacity, it stands to reason that the volume of their electric vehicles on the road will quickly exceed Tesla’s.
- Tesla could add convenience stores; or vending machines, to the superchargers. These businesses are not dignified, but they can be profitable.
- Tesla can sell; or lease, supercharging equipment to filling-station operators.
- A major opportunity is big retailers such as Kroger (NYSE: KR) which operates 1,330 supermarket fuel centers and 782 convenience stores. Supercharging would be a great opportunity for Kroger; because the drivers will need something to do while the car is charging. That something could be to go into Kroger (or Ralph’s or King Soopers both of which Kroger owns) and shop. If Musk could get Kroger to add superchargers to its popular rewards points program; which gives cardholders a discount on fuel for every $100 worth of groceries they buy, he could tap a gig stream of customers. An interesting possibility here is that Kroger could give free electricity to consumers that bought a certain amount of groceries. Other big brands he could tap are Walmart, Meijer and Safeway.
- Tesla Energy; and Musk’s other company SolarCity (NASDAQ: SCTY), could provide infrastructure for supercharging. Tesla Energy’s Powerpack batteries would provide a steady source of electricity for vehicles. Solar City’s solar panels could generate electricity for the superchargers.
Tesla needs all the Money it can get
Tesla desperately needs all the money it can get, because the first quarter earnings report revealed that the company is burning through cash right now.
It’s net income; for example fell by $621.58 million between March 2015 and March 2016. Tesla reported a net income of -$398.42 million in March 2015 that fell to -$1.02 billion a year later.
Some of the other numbers at Tesla were astoundingly bad. The company reported a profit margin of -24.61% and a diluted earnings per share figure of -7.803 for the first quarter of 2016. No, I’m not making this up these are the current figures for Tesla available at ycharts and elsewhere right now. They come from Musk’s own earning report.
Other dismal figures at Tesla included a free cash flow of -$466.46 million and a return on equity of -103.4%. It looks as if Tesla is losing money every time, Musk turns on the lights at the factory, or the opens the door at the gigafactory.
Tesla is burning through Cash
Those who doubt that statement need to take a look at Tesla’s cash from operations numbers. Tesla reported -$642.31 million in cash from operations for first quarter 2016; that means Musk has to borrow money or sell stock to cover the bills.
What’s worse is that Tesla’s cash from operations is falling fast, back in March 2015, Tesla reported -$247.85 million in cash from operations. These figures indicate that Tesla has burned through $394.81 million in cash during the last year.
Tesla has not reported positive cash from operations since September 2014. It has reported negative cash from operations for six straight quarters. If this were any other company, investors would be talking about the death spiral and bankruptcy.
One Bright Spot in Tesla’s Earnings Report
To put things in context; Ford reported making $17.85 billion in cash from operations during first quarter 2016. Fiat Chrysler Automobiles (NYSE: FCAU); widely regarded as the sick man of the auto industry, reported $10.83 billion in cash from operations on December 31, 2015.
There was only one bright spot in Tesla’s earnings report; the company did make $2.053 billion in cash from financing. That was a $1.53727 billion increase from March 2015; when Tesla reported $513.73 million in cash from financing.
It looks like Tesla is dangerously close to the death spiral. Therefore it is easy to easy to see why Musk is looking into other sources of revenue – such as filling stations. Tesla is going to need all the money it can get and soon to survive.