When government-subsidized companies go under, taxpayers pay. That’s why I thought this piece in the Wall Street Journal about the highly subsidized battery-driven Tesla automobile (which I mentioned here yesterday) was interesting. It’s not clear the company will survive without the substantial government support it’s received:
Rather than quibble over a few million dollars here or there, investors need to focus on the big picture of a car maker now worth $6.6 billion that has attracted many skeptical “short” sellers betting against the stock. Even with sales seen surging more than sixfold to over 20,000 cars this year, that is a debt-adjusted market value per vehicle some 90 times as high as at General Motors Co. GM +1.20% Is Tesla worth it?
Comparing a Tesla to any GM car, even the Volt, is like mixing apples and oranges, of course. The $100,000 price tag for Tesla’s best-selling model puts it in the realm of high-end luxury, as does its projected gross margin of 25%. And 20,000 units is substantial for a car maker in that category—four times the combined U.S. sales of Maserati, Lamborghini and Ferrari. It is also double the U.S. sales of the market’s leading purely electric vehicle, the Nissan Leaf.
Those sales look achievable for now given a long waiting list from wealthy, environmentally conscious buyers. More troubling is what drives Tesla’s margin. With state and federal subsidies of $10,000 per car sold in California and state emissions credits potentially worth thousands more, much of that profit could be erased in a few strokes of a government pen.
Investors confident enough that subsidies will remain in place for what is a luxury item still have to mull the car maker’s long-term earnings goals. These hinge on Tesla becoming a profitable mass-market manufacturer. Since global auto makers lose thousands of dollars per vehicle on electric cars today, the prospects are hazy. One dramatic step taken recently by Chief Executive Elon Musk was personally guaranteeing the resale value of the Model S will be the highest of any luxury sedan.
Even for a billionaire, that is quite an undertaking for a car with a battery that deteriorates over time. Unfortunately for shareholders, he hasn’t made a similar offer for the stock.