Shares of Tesla (NASDAQ:TSLA) jumped 6% last week after the company inked a charging station deal with rival General Motors (NYSE:GM). Under the new agreement, GM EV drivers will be able to charge at 12,000 Tesla Superchargers across North America starting in 2024. The legacy automaker will also include Tesla’s North American Charging Standard (NACS) in all new models, mirroring a similar agreement Ford (NYSE:F) made last month with the EV maker.
At first glance, this seems like excellent news for Tesla. Surly, a queue of Mustang Mach-Es and Chevy Bolts at Tesla’s Superchargers means a wellspring of profits… every 250 miles of range generates between $20-$25 in revenues.
But a deeper look shows that Tesla is only a second-order beneficiary. The Texas-based EV firm has no monopoly over its charging standard, so competitors can quickly jump in. On Monday, Blink Charging (NASDAQ:BLNK), ChargePoint (NYSE:CHPT) and Tritium (NASDAQ:DCFC) all announced they would begin offering Tesla’s NACS connectors. Blink is already in the “final stages” of rolling out this new standard.
The capital-intensive nature of charging stations also makes them financially unattractive. No pure-play charging company has yet generated profits, and there’s a reason why Exxon Mobil (NYSE:XOM) hasn’t converted all its gas stations into EV charging ones yet. Returns on capital invested (ROIC) for the three pure-play charging companies range from -42% at Blink Charging to -75% for Tritium. It’s unlikely that Tesla will ever generate the 10% margins that its CEO aims to achieve if there’s no walled garden.
The American gas station industry shows us that financial benefits tend to accrue upstream and downstream rather than in the middle. And Tesla’s Supercharger news will likely do the same with these surprising EV stocks.
General Motors (GM)
The biggest winner from the Tesla Supercharger deal is General Motors itself. The Detroit automaker will allegedly pay Tesla nothing for access, freeing up capital for its own EV ambitions.
GM already has some of the lowest costs in the industry thanks to its post-2008 reorganization. Under CEO Mary Barra, the firm shifted to a demand-pull model, producing only enough vehicles to satisfy orders. The company’s operating margin has risen from 3.7% in 2011 to 6.2% today, and Morningstar analysts believe the automaker can still break even if the entire U.S. auto industry shrank by a quarter.
Ms. Barra’s deal with Tesla will help the legacy automaker maintain its low-cost position. According to estimates from Electrek, GM could have spent as much as $9 billion to build an equivalent global charging network, or roughly a quarter of its EV budget through 2025.
The deal now offloads that financial burden to Tesla, allowing GM to focus its financial firepower on a separate issue: tackling a bottleneck in battery production. Analysts currently believe GM is roughly 45% behind schedule in ramping up production of Ultium Cells, the batteries that power virtually all of GM’s North American fleet. General Motors can now focus on allocating greater amounts of capital towards these projects.
These projects will be accretive to earnings. Analysts expect earnings per share (EPS) to rise to $7.21 by 2025, a 5% increase from this year’s levels and a 47% improvement from 2020. According to a three-stage DCF model, GM’s potential upside could be as high as 110% if it can maintain $5 billion in free cash flow for the next two decades.
Ford (F)
Ford has followed a similar cost-cutting path over the past several years. The firm partnered with Rivian (NASDAQ:RIVN) in 2019 to help reduce electrification research and development (R&D) costs and has exited key unprofitable markets. The company, for instance, no longer produces sedans for the American market.
Last week, the automaker also announced a charging partnership with Tesla. Under the agreement, Ford EV customers will gain access to 12,000 Tesla Superchargers, adding to the 10,000-plus fast chargers available on its current network. The financial terms were not disclosed, suggesting Ford paid a significant sum for the privilege.
Nevertheless, the deal is a net positive for Ford. The automaker’s shares jumped 10% after the announcement and have risen another 11% since. The firm now trades 30% above its 52-week low price.
That’s because Ford has been a marginal player in charging equipment. Its BlueOval Charge Network relies heavily on third parties, and even its widely touted dealer network will add less than 2,000 new charging locations once you do the math. In other words, Ford needed the deal far more than Tesla did.
The tie-up now tilts the odds in Ford’s favor. Demand for Ford’s popular Mach-E and F-150 Lightning trucks could well exceed the 500,000 production capacity that the firm expects from its new factory when it goes online in 2025. And even if the firm fails to hit its target of 2 million EVs by 2026, it will almost certainly surpass Tesla’s production figures by then.
That said, Ford’s upside is lower than GM’s, given the former’s weaker capital position and lower ROIC. Analysts expect the indebted firm to produce $3.3 billion in free cash flow this year, $5.4 billion in 2024 and then only $4.5 billion in 2025. The lumpier profitability lowers Ford’s upside to roughly $18 per share. That’s still 32% upside, but far lower than GM’s.
Enphase Energy (ENPH)
Microinverter producer Enphase Energy (NASDAQ:ENPH) has also seen its shares spike on the Tesla deals. Since May 25, the firm has added over $1.5 billion to its market capitalization.
Enphase is a picks and shovels play in the EV industry. The company produces microinverters and Level 2/3 chargers for residential use. These products benefit as more consumers switch from gas-powered vehicles to EVs.
The GM and Ford deals add to this upside. Tesla’s solar products compete directly with Enphase, and wider availability of GM and Ford EVs will give end users more reasons to choose Enphase products over Tesla’s Powerwall products.
That’s because mixing and matching systems can create significant power inefficiencies. Tesla owners are often better off buying Tesla-branded solar panels and inverters, rather than combining Enphase’s products. Meanwhile, those buying GM and Fords have more reason to buy Enphase products, which typically sell at a significant discount.
These charging announcements come at an ideal moment for Enphase. Shares of the company tumbled 26% in April after the firm warned about sagging demand in the residential solar segment. A boost from EV chargers is much-needed good news.
Shares are also likely to keep rising in the near term. Analysts have revised earnings estimates up 9% in the past 30 days, a highly bullish signal. A minor acceleration in month-over-month energy prices has also kept demand for solar products higher than expected. Analysts expect Enphase could rise another 47% from current levels.
Conclusion: Charging Stations vs. Carmakers
In early 2023, BP (NYSE:BP) announced it would acquire Ohio-based TravelCenters of America for $1.3 billion. The deal valued the nation’s largest publicly traded travel center network at eight times its previous year’s earnings.
BP, however, likely overpaid for its acquisition. TravelCenters ordinarily generates only 0.5% net margins, valuing the company at no more than $500 million. Its 2022 profits were an anomaly where rising gas prices and low inventory costs sent valuations soaring, at least for long enough for an overpriced acquisition to happen.
The EV charging network often shows a similar disconnect between market prices and profits. ChargePoint Holdings, America’s largest EV charging network, was worth as much as $17 billion in 2021, despite generating similar gross margins to TravelCenters. Two years on, increased competition has actually reduced those figures. Horizontal integration also puts a cap on potential profitability. If charging profits begin to rise, companies like TravelCenters can quickly install charging locations of their own to compete. The firm already has the infrastructure for entertaining road-weary travelers, and its profitability is low enough to incentivize a lateral shift.
Meanwhile, the global vehicle industry has become unusually profitable thanks to a series of mergers and updated consumer expectations. Electric vehicles will create another boost, since EVs are cheaper to produce than gasoline-powered vehicles.
The recent agreement between Tesla and GM might seem to benefit Tesla over everyone else. But longer-term investors will know that the eventual winners will be the ones avoiding the unprofitable business of refueling other people’s cars.
As of this writing, Tom Yeung held a LONG position in GM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.