Element VI Consulting - Element VI Consulting

An Inconvenient Risk

Those of us who were investors through the dot com bubble of the late 1990s / early 2000s era will recall breathless media discussion of the impact of the Internet. The world had changed, and conventional measures of business prospects, like profitability, or price / earnings ratios were outmoded.We even heard in some stories that cash burn might actually be a good thing. It all ended in tears, and our 401Ks were all the worse for it. Many of the media darlings of that era, like MCI, Enron and Global Crossing, are long gone; even large companies that survived – but still lost shareholders a ton of money, like Microsoft and Cisco – are no longer seen as sure bets.

We were reminded of this by the spate of media stories on the perceived risk of a “carbon bubble”, leading to stranded assets in the fossil fuel industry; we wrote about it previously here. But it also got us thinking about another sector where the risk of a bubble is severe, and consequences for investors would be significant.

We’ll take one much lauded company as an example. It began life as a start up, funded with a $465 million low-interest federal loan under a Bush-era program. It recently paid back that loan early, with much fanfare; with somewhat less fanfare it noted in its 10Q that it thereby avoided having to give the Feds a $600 million profit on stock held under a warrant related to the loan.

The company’s stock price is up 80% in the last 12 months, and currently the analyst community rates it as a hold, or moderate to strong buy. Yet it lost $3,300 on every unit it sold in 2013 – a cool $75M last year – selling just 22,500 units. The loss was even after the support of separate federal legislation that provides roughly a 10% subsidy for every unit it sells, and State and local subsides that can add up to another 8-10%. Those subsidies benefit the portion of the richest 1% that comprise the majority of the company’s customers. Helpfully, the company’s website provides a link – for those unfortunates living in areas that do not provide sufficient local incentives – to ask their legislators for more.

The company also depends on a regulatory environment in its home state that effectively requires its competitors to subsidize it – to the tune of almost $130M in 2013.

The company just announced it was planning to spend up to $5 billion to build the biggest factory of its kind in the world. The factory will receive a host of state incentives in whichever of 3 possible states it lands: The company recently assured analysts that it expected to fund no more than 40-50% of the cost. Sales of its products will surely depend on the continuation of the government support mechanisms described above, even though they are routinely denounced by Congressional Republicans.

In an era of unsustainable annual deficits and huge accumulated debt at both state and federal levels, we guess the CEO must just occasionally lie awake at night wondering about whether this financial and regulatory paradise can continue.

We’re talking about Tesla, of course, whose $70,000+ EVs get subsidies of several hundred dollars per ton of CO2 they reduce – even on some charitable assumptions, don’t pay anything at all for the upkeep of the roads on which they rely and, in many jurisdictions, get preferential treatment in HOV lanes, parking and discounted or even free fill-ups (sorry, charge-ups) courtesy of the 99%.

To be clear, pure electric cars are a potentially interesting technology, although they remind us of fusion power: it’s only a decade away, and has been for forty years. And, admittedly, we’re envious of the lucky souls we’re helping to enjoy the Tesla driving experience. But we can’t help thinking if it was that certain a bet, the private sector would fund it unassisted. And we are sure there are plenty of ways the governments concerned could get a better bang for their climate – or even jobs / energy security – buck.

Tesla is just Exhibit A of this potential “other people’s money” bubble. There is an impressive array of companies – and let’s be honest, politically well-connected hedge funds and venture capitalists – who have made bets not so much on expensive new technologies becoming affordable – though that’s part of it – but much more on the continuation of government funded R&D, guaranteed markets, subsidies and regulatory favors.

A change in the political wind – forced by the electorate or the financial markets – threatening these patterns of corporate welfare seems a much more plausible scenario than the world deciding overnight to stop needing fossil energy. We look forward to concerned investors bringing forward shareholder motions requiring these companies to assess and quantify the risk of a change in government policy, and actions they are taking to prepare for it. Tesla, to its credit, does mention – but not in any way quantify – the impact of such risks in its 10Q. It is, however, buried in among pages of other risks, including the limited time available from its CEO, the need to meet onerous environmental regulations (sic) and their ability or inability to meet technical challenges.


Note – An earlier version of this post incorrectly quoted Tesla’s 2013 loss at $135M, it was in fact as $74.5M, as reported in their 10K in 2014.