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Tesla Should Turn Off Subsidies, Wall Street Journal Says

Tesla Should Turn Off Subsidies, Wall Street Journal Says.

“Turn off the taxpayer tap, Mr Musk. It would earn you more friends for the long haul”.

Electric car maker Tesla Motors should wean itself off government subsidies, which have resulted in gains totalling more than $300 million since 2011, according to the Wall Street Journal.

“Why does Tesla, which is already valued at about $27 billion (on the stock market), still need so much taxpayer welfare,” the newspaper said in an editorial.

Last week Tesla reported its net loss widened in 2014 to $294 million, from $74 million in 2013. Sales increased 59 per cent to $3.2 billion. Tesla produced 35,000 cars in 2014, and it plans to deliver 55,000 in 2015. This will include the new Model X, due to be launched in the third quarter.

Investment bankers were also digesting Tesla’s ambitious plans announced after the financial results, and they also indirectly back up the case for less subsidy given the strong profits predicted.

The Wall Street Journal said the latest figures would have been much worse without $86 million in profits from the sales of government emission credits.

Tesla receives excess credits from federal fuel-efficiency regulations and state zero emission vehicle (ZEV) mandates. Tesla can sell the surplus credits to auto makers that fail to meet the rules.

“Last year Tesla made a roughly $150 million killing from selling ZEV credits. That’s up from $130 million in 2013, $32 million in 2012, and $3 million in 2011. All told in 2014 Tesla sold about $216 million in credits,” the newspaper said.

Tesla also benefits from the $7,500 federal tax credit for each electric car sold.

The Journal applauded Tesla CEO Elon Musk for his ambition to expand by 50 per cent a year, and reach a stock market valuation of $700 billion in 10 years, which would put it on a par with Apple.

“Capitalism needs visionaries, but its reputation suffers when companies worth billions soak middle-class taxpayers for profits. Turn off the taxpayer tap, Mr Musk. It would earn you more friends for the long haul,” the Journal said.

Meanwhile some investment bankers were shocked by Tesla’s plan for a 50 per cent growth in spending, and research and development.

In a research note published after Tesla’s results headed “Tesla Pushes the ‘Insane’ Button” on Capex”, Morgan Stanley analyst Adam Jonas had this to say.

“Seems Tesla is preparing to be a much larger company than we have forecasted, leaving us with nervous excitement.”

Jonas said Tesla is targeting capital spending of $1.5 billion in 2015, nearly double his expectation and up 50 per cent year on year. Jonas said this level of spending reflects a company with ambitions to achieve sales of at least 500,000 by 2020, not the 295,000 he’d expected.

“The assumptions in our earnings model seem to be at great philosophical odds with Tesla’s much more ambitious growth aspirations. When thinking about the share price development, the key question we are left with is whether investor appetite can keep up with Tesla’s growth journey and the alignment of forward looking expectations with the capital markets, a balance so important to firms at this early stage of development,” Jonas said.

Evercore ISI said it was staying positive on Tesla, wasn’t worried by short-term hiccups in financial performance or deliveries, and shareholders believed in the company long-term. Eventually, Tesla profit margins would be in the 10 to 15 per cent range, which would put it amongst the best in class. Evercore ISI gave six reasons for sticking with Tesla –

  • Less exposed to market risk than peers, as global demand will exceed supply.
  • Protected against industry risk because of its unique business model and vertical integration.
  • Market leading product with no obvious competition.
  • Substantial brand equity, through product and innovation.
  • Equity certain to grow as it enters new markets and has new products.
  • Government CO2 rules a tailwind for it, a headwind for competition.

“The factors in Tesla’s favour are both powerful and unique to Tesla. We see merit in allocating capital to a leader in the technology of the future,” Evercore ISI analyst George Galliers said.

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