"Acts of God" Could Also Crush Tesla Motors

By Markets Fool.com

Image source: Tesla.

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The Los Angeles Times is on a crusade to undermine Tesla Motors .

Last year, the media outlet published a seemingly scathing report arguing that CEO Elon Musk and his trio of companies are supported by $4.9 billion in government subsidies, although the assumptions and calculations behind that total are overly aggressive and misleading. Electrek has an excellent breakdown of the total and why the numbers are somewhat disingenuous.

Well, the Times is at it again with a fresh opinion piece titled, "Tesla throws cold water on its own hype by admitting huge risks in building the Model 3."

Overplaying your hand

The "huge risks" that author Michael Hiltzik refers to are actually little more than standard disclosures around the plethora of risk factors that Tesla faces. Investors are all too familiar with the risk factors section of any 10-Q and 10-K, since companies go to great lengths to outline anything that could possibly go wrong with the business. This is nothing new.

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Companies tend to go overboard with risk factor legalese, specifically to limit their liability to investors in the event that things go sideways. If disclosures are inadequate, companies open themselves up to another risk: class action investor lawsuits. But just because things can go wrong doesn't mean they will.

The most recent 10-Q has been updated with a wide range of risk factors related to Model 3, since the upcoming EV was unveiled at the end of the quarter. Included are things like the possibility that Model 3 "may experience delays," and that Tesla has "no experience to date in manufacturing vehicles at the high volumes" expected for Model 3.

There are "many key assumptions" involved in the production plan, including Gigafactory construction timing, completion of design and engineering plans, supplier validation, and tooling availability and performance, among many others. To be clear, these risks are very real, and Tesla faces an immense challenge with executing on its plan.

But investors are already keenly aware of these risks, which is why the market is seemingly skeptical about Musk's plans. Hiltzik is aggressively overplaying the storyline here, framing these risk factors as if they're disproportionately probable or news to investors.

It could happen

Two can play at Hiltzik's game. There's another "huge" risk factor for investors to consider: acts of God.

Most companies need several types of insurance to cover possible losses in various parts of the business. Tesla maintains many of the types of insurance that you'd expect of an auto company, including general liability, automobile, property, and workers' compensation, among others. But Tesla chooses not to maintain as much coverage as other companies in other areas, which theoretically exposes it to greater risk. Specifically, here's another risk factor listed in the 10-Q:

We may be subject, in the ordinary course of business, to losses resulting from products liability, accidents, acts of God and other claims against us, for which we may have no insurance coverage.

Losses associated with any uncovered loss could require a significant capital outlay, which could also include large deductibles that Tesla has to pay out of pocket. Any of these could "adversely affect our financial condition and operating results." Consider the possibility that Tesla's Fremont factory were to spontaneously combust as an act of God. While Tesla very likely carries insurance on its primary manufacturing facility, the disruption in manufacturing would wreak havoc on earnings.

Tesla should probably acquire some deity insurance. Can you imagine the hellacious premiums?

The risks are still real

Jokes aside, Model 3 absolutely entails a ton of risks, and investors must carefully consider those risks. That's especially true since Tesla's premium valuation utterly depends on the company becoming a mass-market OEM at some point (hopefully sooner rather than later).

However, risk factor disclosures in SEC filings don't include probability weightings, which is where the tricky and subjective part comes in. As investors, it's our job to assign appropriate weights to these risk factors when making investing decisions. Simply put,Hiltzik is trying to get investors to overweight these risks.

I wouldn't say that Tesla is throwing "cold water" on all the genuine consumer excitement and demand around Model 3, just because it is legally required to document in excessive detail all the things that could go wrong.

The article "Acts of God" Could Also Crush Tesla Motors originally appeared on Fool.com.

Evan Niu, CFA owns shares of Tesla Motors, andhas the following options: long January 2018 $180 calls on Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.