Why Tesla's Woes Aren't as Bad as They Look

Tesla (NASDAQ: TSLA  ) has been one of the standout stocks in 2013, rising more than 300% year to date, and seemingly going from zero to hero in just a matter of months. However, a series of bad news events and increasingly high valuation multiples have sent shares sliding more than 20% in recent weeks.

When negativity abounds, investors should begin to consider (or reconsider) high-performance stocks like Tesla, since their growth impediments are usually never as bad as they seem in hindsight. Here are the main reasons why many investors have soured on Tesla in recent weeks, and why the company will most likely be able to overcome these obstacles.

Feeling the heat
The major source of negativity for Tesla in recent weeks has been the three separate fires that happened to cars in the company's luxurious Model S line. All three incidents were major news events and could have been admittedly scary to consumers and investors alike at first glance. Right now, the Model S in its various trims is Tesla's only major vehicle line. As such, any major threat to the Model S would be a serious logistical and PR problem for the company.

Making matters worse was the media's intense fascination with the fires. As soon as the first video was uploaded on YouTube and went viral, a plethora of articles came out toting an end to the company's largely flawless safety record. Unsubstantiated reports of a fleetwide recall naturally spread as well.

Putting out the fire
It is important to note several things with regard to the fires. First, all three incidents occurred as drivers crashed into obstructions at relatively high speeds. This should alleviate much of the concern; it isn't as if the vehicles spontaneously combusted. Additionally, all three drivers walked away from the crashes largely unharmed, which speaks volumes about the crash safety features of the Model S line. It's quite strange that we haven't heard much about that last part from the media in recent weeks.

Considering that there are now almost 20,000 of the company's cars on public roads, three incidents of fire is a very low number. Just to put that into perspective, in 2012 the National Fire Protection Association estimated that there were an average of 152,300 vehicle fires per year in the United States between 2006-2010. In that span, the NFPA estimated that 17 vehicle fires occurred every hour in the U.S., and were responsible for killing four people per week.

The data above indicates that vehicle fires are not uncommon at all. Furthermore, the data suggests that automobile fires are often deadly events. That no one has yet to die, or even be seriously injured, in a Model S fire should only prove how safe the car actually is.

Unfair double standard
It seems as if pundits and investors are holding Tesla up to higher standards than all other major car manufacturers. After all, people are still way more likely to be involved in a fire while driving a gasoline-powered car than any of Tesla's electric vehicles.

Tesla CEO Elon Musk explained, "The headlines are extremely misleading. If fire risk is your concern, you'd have a great deal of difficulty being in any better car than the Model S. [The Model S] is five times less of a fire risk than the average gasoline car. Moreover, we've never had a serious injury or death." 

Supercharge your portfolio
Investors need to take a breather and approach the situation rationally. Tesla is a company that builds vehicles. They're top-tier and industry-leading vehicles, but vehicles nonetheless. It is a sad fact that hundreds of thousands of vehicles crash and catch fire every year, regardless of power build or manufacturer, and that will unfortunately not stop happening anytime soon. What is fortunate, though, is that all information up to this point indicates that consumers are much safer driving a Tesla when a crash does happen than a traditional gasoline-powered vehicle.

Shares of Tesla have recently paid the price for these unfortunate accidents. However, the pullback now presents investors with a decent buying opportunity. Tesla is still projected to grow revenue by approximately 36% and EPS by a staggering 160% next year. With the expected introduction of a new product line in the Model X, Tesla seems set to capture a whole new segment of the automobile market in 2014. Investors interested in long-term growth will want to be around for the company's turnaround, and now seems like a perfect time to consider buying shares.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2013, at 8:55 PM, Blindnomore wrote:

    Man you are out of the loop with this article. Where have you been? The three fires had been a reason for pushing shares lower but there is much much more to the drop than just three fires. One of them is the company's CEO stating that the stock price was over valued, meaning if you buy the stock you are paying too much for it. If that was not a death blow then Tesla's latest quarterly earnings or yearly report is helping to drive the stake deeper. Sure everyone is pointing at how they beat the streets consensus but what is not being told is how those numbers are non GAAP, they are are juggling huge amounts in their accounting columns using non GAAP compliance accounting to mislead the investing public. They buried the GAAP accounting much further into the report which is against SEC regulations(ie. the law). Those two things I mentioned are hammering this stock into a hole so deep I would not be surprised to see it hit a new 52wk low. Which btw is just above $30 on 11-27-2012. So in other words, if TSLA is to hit a new 52 wk. low, it will happen within ten days.

  • Report this Comment On November 19, 2013, at 1:03 AM, weaponz wrote:

    @Blindnomore - To be fair though, it does not change the fact that the non-GAAP numbers are the correct numbers. Hopefully the SEC will review Tesla's lease/finance hybrid and add it to GAAP rules. The rules are in need of updating since it is not really a lease so it should not be counted as one. That said the stock is not going to hit a 52 week low as then it would be extremely undervalued.

  • Report this Comment On November 19, 2013, at 3:58 AM, socratei wrote:

    I believe in tesla's technology but at near $200 the shares were very overvalued,I have my doubts about the cause of the fires as stated,I believe there is a flaw in the technology that causes a kind of selfcombustion,I hope I'm wrong but have huge questions about these incidents. With an inox protective cache underneath I wonder if some road obstacle can catpult into the batterie or else.

    Technicaly the shares are now on there way to at least $108 if broken $97 if broken $62 and this could be the bottom before it's time to get in for the longer term.

  • Report this Comment On November 19, 2013, at 10:25 AM, damilkman wrote:

    Also overlooked by the horde of TMF writers is this is standard fare for momentum plays. The stock is pushed more by emotion then analysis. The stock could have dropped just as much by Musk declaring butter pecan was great but his new favorite flavor is french vanilla. Rationalizing the drop is about as foolish as rationalizing the huge increase. If you believe in the company each FOOL should do their own analysis, figure out how long they want to hold and project the value at that time. Never mind the perturbations of the chicken littles in between.

  • Report this Comment On November 19, 2013, at 8:32 PM, AceInMySleeve wrote:

    The real problem at Tesla is not the fires IMO but the battery production issues which will be felt when they try to scale to the volumes necessary to support the market cap.

    Tesla is getting a discount for using excess production from Panasonic on the 18650 battery format which is predominantly used in Notebook PCs, which has suffered from weak demand.

    Going forward Tesla either has to build and amortize new production facilities, or get someone else to do that. Battery prices for Tesla may not decline sufficiently to support a mainstream model, and possibly will go up.

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