Shares of Hertz Global Holdings, Inc. (HTZZ), an American car rental company, gained more than 7% last Monday after the company announced plans to buy 100,000 Tesla, Inc. (TSLA) cars by the end of 2022 to power its vehicle fleet.
The company, after recently emerging from bankruptcy, has benefited from strong leisure travel demand and the increasing prices of rental cars due to vehicle shortages.
Even after reporting strong financial results for the most recent quarter, analysts believed that ride-hailing market leaders such as Uber Technologies, Inc. (UBER) would eat into Hertz’s profitability. However, by adding electric vehicles to its fleet, Hertz can strengthen its market position amid the growing focus on ESG factors by both consumers and investors.
I am neutral on Hertz stock but I certainly appreciate what the company is doing to secure its future. (See Analysts’ Top Stocks on TipRanks)
The Deal Comes amid Increasing Demand for Electric Vehicles
Hertz’s aim to convert more than 20% of its fleet to Tesla electric cars will allow the company to grow its fleet size, which was previously limited, and would likely result in higher rental rates for the attractive Teslas as well.
The rental car company’s fleet size has been limited due to the global chip shortage. However, Tesla managed production issues better than any other automobile company amid the global chip shortage by switching to microcontrollers and building new firmware to deal with new chips from different suppliers. This is why partnering with Tesla will be a big advantage for Hertz.
The top executives of Hertz also claim that Tesla is the only manufacturer capable of producing electric vehicles on a large scale that is sufficient to achieve cost advantages, which is why the company has decided to partner with Tesla to electrify its fleet.
Another reason for adding Teslas to the fleet, according to management, is that these vehicles are less expensive to maintain and refill than non-electric vehicles. Furthermore, their resale value is often much higher in comparison to gasoline-powered vehicles.
According to the company, customers in the United States and Europe will be able to rent Tesla Model 3 vehicles starting in early November. The company is also installing its own charging stations and customers will have access to Tesla’s supercharger network too.
In addition, Hertz will also offer digitized guidance to educate customers about Tesla vehicles, as well as the rental booking process through the Hertz mobile app, which is expected to hit app stores soon.
The company also announced that it is partnering with Tom Brady, the seven-time Super Bowl-winning quarterback, to star in new commercials to market the partnership with Tesla.
With the rising demand for electric vehicles, Hertz seems to have made the right move by focusing on this lucrative target market, which might help the company achieve a competitive advantage among its peers.
Hertz is finally set to become a frontrunner in embracing macroeconomic trends too. This is a good sign as the company has been hesitant to embrace new trends as of late, which was one of the main reasons behind its lackluster financial performance in the last decade.
The deal will also benefit Tesla since its cars will get exposure to Hertz’s large customer base. This will improve the likelihood of increased electric vehicle adoption among both leisure and corporate customers.
According to Pew Research Center, 39% of Americans are willing to consider buying an electric vehicle the next time they need a new vehicle.
Although the terms of the agreement are unclear, a Bloomberg report highlighted that the deal will bring Tesla $4.2 billion in revenue and that Hertz is paying close to the full price. This is in contrast to the traditional practice of rental companies purchasing vehicles at a discount from automakers.
TipRanks’ Smart Score
Looking at TipRanks’ Smart Score rating system, Hertz scores a 9 out of 10, or in other words, an Outperform rating.
Although many analysts have abandoned their coverage of the company of late, Hertz is likely to attract Wall Street analysts once again in the coming months as the company is clearly making much-needed changes to secure the sustainability of its long-term earnings.
Takeaway
Hertz is making a strong comeback, and the company is laser-focused on retaining its market share in the car rental industry by introducing innovative solutions to its customers.
The partnership with Tesla is likely to help the company develop competitive advantages, which could pave the way for Hertz to report stellar earnings growth in the next couple of years.
Although Hertz is yet to get out of the woods, this partnership paints a promising picture of what the future holds for the company.
Disclosure: At the time of publication, Dilantha De Silva owned shares of Uber Technologies.
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