The Problem with Tesla Stock
Norway gave fans—and especially investors—of Tesla Motors Inc (NASDAQ:TSLA) stock some reason to celebrate today.
The big news is that Norway may have launched the first salvo of the electric car revolution. All four of that country’s main political parties have agreed to ban the sale of internal combustion engine cars starting in 2025. Only so-called zero-impact vehicles will be sold in the Scandinavian country after that date.
There is no denying this is a boon for Tesla stock—for the time being, at least. Tesla is the world’s most famous maker of electric cars. However, others are coming along and they include companies that have been making cars and trucks for decades.
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Electric motors are not as futuristic as many think. They were around in the late 1800s and lost to internal combustion technology then because of their inferior practicality. Still, General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), Fiat Chrysler Automobiles NV (NYSE:FCAU), and, of course, BMW, Mercedes, Nissan, Toyota, Hyundai, and many others all have some version of a zero-emission car in their pipelines.
While the $35,000 sticker price for Tesla’s “Model 3” is unrealistic, it would still be a good value at $50,000. However, fewer people (i.e. fewer budding environmentalists) will be able to afford it. GM, Ford, and others will have cheaper electrics out before Tesla. Why did their stocks not rise on the Norway 2025 plans?
Nobody is suggesting there is no place for Tesla. Certainly the California-based car company has earned its place in the annals of automobile history. However, Tesla stock’s current valuation doesn’t make sense; eventually, reality will set in.
There is another issue, too. While the GMs and Fords of this world acknowledge they have to offer electric cars to meet market demand, Tesla is different. The company embodies its founder’s messianic “save the earth” vision. Yet there’s evidence to suggest Elon Musk drinks his own “Kool-Aid.”
While a vociferous and overly gullible group of people goes on about Tesla’s superior environmental rigor, there is an ugly side to Tesla—and electric cars in general. Tesla Motors shareholders may want to consider this.
Doubtless, 276,000 pre-orders for the as yet unavailable Tesla Model 3 in just 72 hours speaks loudly: there is a market for a cheap electric mid-sized sedan that announces to the world, to borrow from Birdman, “I put some respek” on the environment.
But if you were really one to put respect on the environment, you would do the planet a bigger favor by buying a used car. Indeed, “reduce,” “reuse,” and “recycle,” are the buzzwords of environmentalism.
Those who drive classics cut back on imported steel, rare earths, and graphite to make the cars. They put much less pressure on the power grid and the coal power and oil fracking that fuels it.
Then there is the hypocrisy of the actual Norwegian plan itself. Norway is Europe’s largest oil producer. By cutting back on gasoline, it has more petroleum to sell to the export market at non-subsidized prices. The same reasoning is prompting countries like Saudi Arabia and Iran to seek alternative energy–producing methods from nuclear to solar farms. Norway doesn’t need to worry about that. Thanks to geography, it has more than 90% hydroelectric power, clean and reliable.
There’s also the fact that electric vehicles can create major environmental damage with their lithium-ion (Li-ion) batteries, which are not easily recyclable.
Holland, which proposed similar legislation to Norway’s a few weeks ago, has already experienced the boomerang effect of placing too much credit on electric cars’ alleged environmental superiority.
Holland wants to improve the environment, reducing pollution and emissions. All of this is good, but it could backfire. Those who buy electric cars for environmental goals might end up finding themselves in the same situation as those who bought a Volkswagen before the recent scandal. (Source: “Electric cars and the coal that runs them,” The Washington Post, November 23, 2015.)
Indeed, the boom (no pun intended, hinting at the frequent battery fires) in electric cars will actually increase the energy needs of the country. That’s great for Norway, which has a small population that is barely the size of Manhattan’s and plenty of hydroelectric power. However, how realistic is it for the United States or any other dense European, let alone Asian or African, country? A single so-called green car with one charge consumes as much electricity as a refrigerator in a month and a half. The Dutch government, to cope with its poorly considered legislation, has opened three new economic super-polluting coal-fired power plants, two of which were built in Rotterdam. (Source: Ibid.)
Electric cars have simply shifted the responsibility for polluting from the city to the suburban environment, where most coal—or in some cases, nuclear—plants are located. As for the carbon dioxide emissions everyone is so keen to cut back on, nothing changes.
Eventually, someone will wake up to that reality and Tesla cars won’t appear as cool anymore. They will actually have to compete in the market as cars rather than methods to correct their rich human drivers from environmental sins like some charlatan preacher. That’s when the chickens will come home to roost on Tesla stock.
If Tesla can deliver a truly cheap vehicle that happens to be electric, then the company has a chance at competing against Detroit.
(Note that this argument doesn’t even include the fact that Tesla Motors is relying too much on tax incentives and subsidies, weakening its entire business case.)