The Independent Market Observer

9/18/13 – More Thoughts About Tesla and Energy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 18, 2013 11:31:39 AM

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Yesterday’s post about Tesla and the valuation of its stock prompted some second thoughts after I sent it off, particularly the offhand mention of déjà vu. I stand by the conclusion that Tesla’s stock is probably overvalued, but I think it’s worth spending some more time talking about the company as a bellwether for very positive changes in the U.S. economy. What Tesla means extends well beyond whether the company makes it or not.

Let’s set the wayback machine to the dot-com boom. I remember it well, as I was running a start-up in Seattle at the time, among other things. The world looked like it was changing for the better; the new economy was going to make us all rich. People were going to play, shop, and communicate online.

Well, not all of us got rich, but, if you think about it, the rest absolutely came true. I buy all my books on Amazon now. I have Facebook and LinkedIn profiles. My wife shops almost exclusively online. As usual, the satirical newspaper The Onion put it well with the headline “Man Lives In Futuristic Sci-Fi World Where All His Interactions Take Place in Cyberspace.” The dream came true, but it’s just not as exciting now that we’re used to it.

Consumers have benefited. I believe one of the major causes of lower inflation in recent years has been price transparency created by the Internet. Every time you buy something, you benefit. Mapping software on my phone has saved me hundreds of hours over the years. And the list goes on and on. The fact that we take so much of this for granted doesn’t mean it’s not real. That many of the companies of the 1990s failed doesn’t diminish the real benefits to consumers, or the success of the survivors.

Which brings us back to Tesla. Regardless of whether the company survives, it has already accomplished two important things. First, it demonstrated that electric vehicles can work. Second, by making electric vehicles not just a “need” but an aspirational “want,” it has created a new space that other companies feel they have to compete in—just like the iPad did. By making electric sexy and demonstrating what could be, Tesla has already changed the narrative. GM wouldn’t be moving into electrics without Tesla’s success. And VW plans to bring an electric vehicle to the U.S. in two years, per today’s New York Times. Debates in Washington over whether electric vehicles can succeed are now moot—they have. Just as the iPad created an entirely new category of product, and the Kindle created an entirely new way to read (and sell!) books, the Tesla has carved out a new space in which companies have to invest and compete.

The electric vehicle trend is also in line with the overall trend in energy, which I wrote about most recently in May. I talked briefly about Tesla there and also mentioned that utilities were getting into the alternative space, driven by fear. The fear is still there, and it’s getting worse. In fact, it’s front-page news in today’s Wall Street Journal, with a story detailing how many companies are generating their own power using alternative sources, such as solar or biogas, rather than buying it from the utilities. This hits utilities twice, first by dropping overall sales and second by taking their most profitable customers.

Utilities are in a bind. As companies increasingly move off the grid, utilities have to charge their remaining customers more to pay for a fixed infrastructure of generators and transmission lines, which increases the incentive for more customers to leave, which leads right into a vicious circle.

The trend is further along in Japan, where residential customers in the tens of thousands are going off the grid. We don’t have that kind of trend in the U.S. yet, but as I wrote last summer, more and more regular people are installing solar grids on their homes, and that is the first step. As more technologies become available (fuel cells are becoming big in Japan) and cheaper (solar cell prices have dropped 80 percent in the past four years), the trend can only grow. As with Tesla or the iPad, the idea isn’t that the first entrant will dominate forever; it’s that, with more entrants and cheaper prices, the trend will continue to expand.

Last October, I suggested that we were just about at the hockey-stick jump in the growth curve as far as energy goes. This year, I’m even more confident that’s the case. Just as with the cyberspace revolution, which ended up being so pervasive we don’t even see it any more, I expect the energy revolution will end up transforming our lives. The effects this time will, again, make things cheaper and better, but also help transform the competitive position of the U.S. economy in the world as a whole. Energy independence will be one piece of this, but there will be many others.

At the same time that consumers and the economy as a whole benefit, there will also be losers. With the Internet, the losers have been newspapers and retailers, to pick two of the highest profile. While focusing on the possibilities for the energy revolution, we should also be aware of the industries in the crosshairs. You might want to take a look at your utility investments.

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