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Investors should view the world as it is, not as they wished it were. If only we were so calibrated with reality.
More investors than I can count wish, hope, and even pray, that the entire world were powered only by sun and wind, with the energy produced by both stored in lithium batteries. They are equally prone to wish, hope, and pray that this clean technology is subject to Moore’s Law, where power increases and relative costs decrease exponentially.
Outside of computer technology, Moore’s Law is mostly fantasy, and yet investors are investing as if it were reality. I refer to most alternative energy investments in general; I refer to Tesla Motors (NASDAQ: TSLA) and SolarCity (NASDAQ: SCTY) in particular. Together, these companies are valued at roughly $30 billion.
Elon Musk, Media Idol
Together, these two companies also share a bond with financial media’s most idolized business darling – Elon Musk.
Musk is chairman and CEO of Tesla Motors, whose equity investors value at $28 billion. He will soon serve a similar role at SolarCity, whose equity investors value at $2 billion, once the former completes its planned acquisition of the latter. For now, SolarCity is conveniently run by Musk’s cousins Lyndon and Peter Rive.
Both companies appear to have adopted the confused merchant’s mantra: We lose money on every sale, but we make up for it in volume.
True enough. Since 2006, Tesla revenue has gone from nothing to $5.9 billion over the past 12 months. That’s a lot of volume growth. Over the same time, Tesla has generated mostly operating losses and nothing but net losses. SolarCity has been a publicly traded since 2012. Revenue has grown to $624 million from $127 million. SolarCity has produced nothing but operating and net losses as a publicly traded entity.
To be sure, many startups generate losses as they grow and reinvest in the business. If the business is legitimate and genuinely satisfies consumer demand, cash will eventually flow positively. On that prospect, investors will rightly value such a money-losing entity positively today.
But much of what Musk and family call businesses are neither legitimate nor genuinely satisfying consumer demand. Tesla Motors and SolarCity (and we can add Musk’s SpaceX to the mix) are monuments to crony capitalism and waste. Neither would exist without the redistributive hand of government.
Every Tesla Motors car is imbued with a $7,500 federal government tax credit, which, in essence, knocks $7,500 off the list price. Tesla collected more than $517 million from competing automakers by selling environmental credits (government gifts, really). At the state level, Nevada agreed to give Tesla $1.3 billion in incentives to help build a massive battery factory near Reno. But apparently that’s insufficient taxpayer support to prevent the electric-car company from losing $4,000 on every vehicle it sells.
As for SolarCity, New York, under the guidance of governor Andrew Cuomo, granted at least $750 million of its taxpayers’ money for SolarCity to build a factory. The state will then charge SolarCity only $1 per year in rent to occupy that factory. And like Tesla, SolarCity benefits from a consumer tax credit. Buyers of Solar City’s energy systems are allowed to deduct 30% of the cost of their SolarCity system off the bottom line of their federal taxes.
In total, Musk-connected businesses – Tesla Motors, SolarCity, and SpaceX – have benefited from an estimated $4.9 billion in government support, according to data compiled by The Los Angeles Times. Despite all the largess, none of these businesses make money.
Now, you could argue that I’m avoiding the real world, which, unfortunately, includes Musk-connected businesses that are massively subsidized. Fair enough, but I am also embracing a real world where your long-term survival is based on economics, not on money pinched from taxpayers.
Tesla and SolarCity: Value at Zero
Nothing in the history of battery-powered cars or alternative energy points to long-term survival based on economics. For decades, and for more than a century for the battery-powered car, the future has always resided just over the horizon. And when the horizon arrives, we find it littered with failure (Bright Source, Solyndra, Ener1, and many more).
My back-of-the-envelope analysis (and I don’t need more than that) values Tesla and SolarCity at zero. Actually, my analysis values them at less than zero. The opportunity costs associated with both companies are huge. Capital that could have been invested to develop legitimate, market-driven power sources and consumer products has been squandered on a fantasy.
As a seasoned investor and world observer, I can tell you that whatever supplants the internal-combustion engine (if anything does), won’t be discovered by endless government-directed spending in tired, backward-looking, perennial-failure industries (solar, wind, and batteries). It will be discovered by market-driven, profit-seeking, forward-looking entrepreneurs, if the government will let them.
Though my analysis of Tesla Motors and SolarCity leads to a sub-zero value, this isn’t to say you can’t make money trading their respective securities. But this is to say that you will lose money if you invest in Tesla Motors and SolarCity, because fantasy investments always end in losses.