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Tesla's Slow Burn

Investors in Tesla (NASDAQ: TSLA  ) got burned along with the pricey electric car when a video posted to YouTube showed one of the vehicles fully engulfed in fire as a result of what was ultimately determined to be a battery problem.

The Model S had hit a piece of metal in the roadway, sparking the battery blaze. The incident ended up incinerating Tesla stock, too, as it fell by more than 6% in the days after the incident.

As much of a critic of electric cars as I've been, this hardly seems to be a rational decision by the market. This incident isn't akin to General Motors' (NYSE: GM  ) ¬†Chevrolet Volt fires weeks after crash testing, or even to Boeing's (NYSE: BA  ) state-of-the-art Dreamliner, which also has suffered from battery fires. There was direct cause and effect, and to suddenly fear that all Teslas would go up in flames seems ludicrous. While the battery fire raises safety questions, when you consider that gas-powered vehicles can carry dozens of gallons of flammable fuel, the battery pack seems the safer alternative.

Only the reaction is not as crazy as you'd first countenance. Tesla has been the can-do electric-car company, succeeding -- even profiting -- where critics (myself included) thought it unlikely. In that environment, investors bid its shares higher and higher to the point that, even with the company's tumble, the stock trades 500% higher than it did a year ago.

That, my friends, is a stock priced for perfection. That is a company that can't be allowed to have anything go wrong. And despite the advances the industry has made in perfecting the technology, the battery has been the weak link. From long recharging times to limited distance, not to mention the cost of replacement when the batteries finally and inevitably fail, if there was something that was going to hold back the car this was it.

Tesla has seemingly overcome most of these issues. Its new technology can go some 265 miles, further than any other EV on the road; its Superchargers recharge drained batteries roughly 20 times faster than standard chargers; and it has developed battery-swapping technology that's sort of like a propane tank exchange: for $60-$80, and 90 seconds of your time, you can "fill up the tank" with a new battery pack and continue on your trip. That's about the cost of a tank of gas and about half the time.

Of course, the catch is that you have to return the new pack on your way back or you be charged the cost of a new battery.

It's estimated that a new Tesla battery pack costs between $30,000 and $40,000 -- ouch! -- but if you purchase a replacement plan within 90 days of buying the car you only have to pay $12,000. The catch to that is that it's only good after the eighth year of ownership. However, that in itself says Tesla expects a battery pack to last at least that long before it must be replaced, as well as anticipates that the cost per kilowatt will dramatically fall by then.

But all of the above shows that CEO Elon Musk is at least thinking about the technology's weak link. The failures of the companies that developed batteries (e.g., A123 Systems) and those that produced the cars (e.g., Fisker Automotive) indicates a very young industry that is still going through fits and starts.

On its own, though, one car catching fire after a run-in with a road hazard shouldn't be enough to cause its stock to be so flammable. It ought to give investors pause that buying into a company on faith in its infallibility suggests there may be lower levels yet for Tesla to test.

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  • Report this Comment On October 05, 2013, at 2:37 AM, greenknight32 wrote:

    The Volt fires were even less meaningful - the testers ignored the manufacturer's recommendation the the batteries should be drained of energy after a serious crash, left wrecked cars sitting around for weeks with batteries still charged.

    The Tesla stock price drop was as much due to fears that the stock was over-valued as this car fire. It might well have dropped some anyway.

  • Report this Comment On October 05, 2013, at 6:28 AM, Barmil wrote:

    Tesla has been the can-do electric-car company, succeeding -- even profiting -- where critics (myself included) thought it unlikely. In that environment, investors bid its shares higher and higher to the point that, even with the company's tumble, the stock trades 500% higher than it did a year ago.

    That, my friends, is a stock priced for perfection.

    So who do you blame for this irrational perfectionist thinking?

    There will be more glitches that show up over time and they will be addressed by a solid company. No more no less.So why yell the sky is falling you knew it would happen it just wasn't in your schedule.

    Perfection is a simply not going to happen,if it is made by man it is flawed,only a fool would think otherwise!

  • Report this Comment On October 05, 2013, at 1:52 PM, StanO6 wrote:

    @RichDuprey: "fully engulfed"? Clearly, you did not watch the same video that I did. The flames were clearly limited to the frunk area only. Link to the video you watched would be appreciated.

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