Irrational Exuberance

That is the phrase made famous by Alan Greenspan in describing the dot com bubble of the late 1990s.  Today, it could be applied to the investment bubble in Tesla.  The Wall Street Journal reported that Tesla has surpassed Ford Motors in terms of investor value even though it sales are 1% of Fords and Tesla’s earning per share and net income have been negative since it came into being. Since there are no signs of it earning a profit anytime soon, especially if government subsidies are taken away, investors, except the shrewd ones, are displaying irrational exhuberance.

The LA Times ran an article on Elon Musk two years ago and made the point that Tesla wouldn’t be around without the $4.9 billion in government subsidies.  Musk has raised crony capitalism to an art form and has perfected the Bootlegger and Baptist scheme for getting very rich by becoming an environmental icon.

Without continued taxpayer funding, Tesla would have gone bankrupt as Solyndra and A123 systems did.  As the LA Times pointed out, the Model S, which is the wealthy’s symbol of environmental political correctness, “sells for more than $100,000, but that is literally tens of thousands of dollars less than it costs to manufacture and sell.”

The Times went on to say, “Every time a Tesla is sold, we witness a transfer of wealth to a rich hobbyist (most Teslas are their owners’ third or fourth car), while average Americans are on the hook for at least $30,000 in federal and state subsidies. Tesla is more a regulatory arbitrageur than an auto manufacturer.”

In addition, to the $7500 federal tax credit, a number of states provide credits or rebates to Tesla buyers.  Not surprising, the most outrageous is California which created a zero emission mandate requiring an arbitrary number of “zero-emission” vehicles to be sold each year. Tesla’s Model S earns four emission credits per unit sold which it then sells to other manufacturers for $20,000 with the cost borne by California taxpayers.  A few years ago, Tesla received over $129 million in these credits but still lost $61 million in its manufacturing and sales.  Clearly you can’t go broke as long as you are spending someone else’s money.

The image of a zero emission, high mileage vehicle that is affordable for most is almost every driver’s dream.  And, Tesla is promising a new lower cost Model-3 in the near future–$35,000.  Investors must be betting on economies of scale lowering cost enough, including battery costs, to make the Model-3 really affordable with a range greater than 200 miles between charges.  Absent a battery technology breakthrough, which doesn’t appear likely any time soon, lithium ion batteries and their costs will limit Tesla’s range and the potential loss of subsidies limit Tesla’s future.  Ford has the brighter future.

Early investors who sell before reality strikes will make a killing, leaving cult investors who bet on a dream holding the proverbial bag.  Tesla stock is likely to be our generation’s version of Holland’s Tulip Mania in the 1830s.



Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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