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Why a Tesla Recall Wouldn't Matter

Shares of Tesla Motors (NASDAQ: TSLA  ) have been extra volatile lately following the National Highway Traffic Safety Administration's, or NHTSA, decision to launch a formal investigation into two of the recent Model S fires. On Tuesday, the NHTSA said it was evaluating potential risks associated with "undercarriage strikes" on Tesla cars. If the investigation leads to a recall, it could affect more than 13,000 Model S vehicles on U.S. roads today.

What's more, Tesla has lost nearly a third of its market value over the past month because of these fires. Still, a possible recall matters much less than you might think. Here are three key things to consider before selling into the panic.

Will this matter a year from now?
In a word: no. The EV maker and its outspoken CEO are already notably ahead of the situation. In a blog post on Monday, Elon Musk outlined the various actions Tesla is taking to quell fire safety concerns involving its Model S car. The first of these is a software update that changes the suspension of the car at highway speeds. While this "over-the-air update" has already taken place, the company says a second software overhaul is coming in January that will give drivers even more control over their cars' air suspension ride height.

Separately, Musk said the company amended its warranty policy to cover fire-related damages. "Our goal here is to eliminate any concern about the cost of such an event and ensure that over time the Model S has the lowest insurance cost of any car at our price point," he said in a public note.

This could lead to higher costs for Tesla and, ultimately, its shareholders, but in the end investors are betting on Musk's competence -- and if history is a reliable judge, that's a smart bet to take. Musk finished by saying, "Either our belief in the safety of our car is correct and this is a minor cost or we are wrong, in which case the right thing is for Tesla to bear the cost rather than the car buyer."

A recall at this point isn't likely, particularly because Tesla has already taken measures to increase the six-inch clearance between the ground and the undercarriage of its Model S cars. Yet even at the six inches, the Model S is higher off the ground than many other cars on the road today, including the "Mercedes CLA Class at 3.9 inches and a Dodge Charger at 5 inches," according to auto writer Tom Krisher.

The bigger issue hiding in the flames
Tesla doesn't have a safety problem; it has a perception problem. With news of Tesla's three fires being blown out of proportion, a potential recall is the last of Tesla's worries. The issue of more concern is what this negative press might do to Tesla's reputation for being the world's safest car. Earlier this year, the Model S achieved the best safety rating of any car ever tested.

It's not surprising, then, that Musk is fighting to protect Tesla's brand image. His reasoning is sound. In order to accelerate the switch to electric cars, the public needs to be confident in the safety of the technology. Tesla has gone to great lengths to make its cars the safest on the roads, even when that meant issuing a partial recall earlier this year for a small mounting bracket in the back seat of its Model S.

The level of detail this company has shown in regard to driver safety is awe-inspiring. Tesla isn't trying to cut corners; it's trying to build an excellent car company that paves the way for the future of transportation. Automakers issue recalls all the time, and as Tesla continues to ramp up production in the years to come, it too may face such setbacks.

But by focusing on the bigger picture, long-term investors can take advantage of these dips. Tesla's demonstrated its strength at turning obstacles into opportunities in the past, and I suspect Musk's company will continue to do so well into the future.

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Read/Post Comments (8) | Recommend This Article (2)

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 20, 2013, at 12:38 PM, Decoy0527 wrote:

    Tesla has a very, very small niche market populated by wealthy green wannabees. It will be impossible for Tesla to maintain a 25% operating margin if, in the unlikely event, that the high priced EV becomes mainstream. If that happens, Tesla is likely to get run over by BMW, Mercedes, Toyota, and Audi. I went short Tesla at $175, and I'm staying with it.

  • Report this Comment On November 20, 2013, at 12:50 PM, drax7 wrote:

    I would not be surprised to see teslas gross margins exceed 30%, as the simplicity of design and power plant ,allow for lower manufacturing costs.

    Elon musk is the man with the right skill set to make it happen.

  • Report this Comment On November 20, 2013, at 1:23 PM, 76R906 wrote:

    Breakthrough technologies and vision that have produced Tesla vehicles threaten the status quo, and you can be sure that Detroit and Big Oil, who have the most to loose, are behind the overblown bad publicity.

    Musk's comment, "...the three Model S fires, which only occurred after very high-speed collisions and caused no serious injuries or deaths, received more national headlines than all 250,000+ gasoline fires combined." This is surely indicative of an agenda to damage Tesla's reputation and business.

    As for crowing about going short on a company with the resources, management, and vision of Tesla - well, time will tell! I'm long on TSLA and I'm staying with it.

  • Report this Comment On November 20, 2013, at 1:52 PM, Blindnomore wrote:

    This stock is one that should be played daily for its great moves up and down through the day. I wouldn't take a buy and hold position or a short and hold position either. At this price the stock could go either way and it does daily to the tune of about five bucks in each direction or a total of ten dollars movement a day. Great for continuous in and out positions.

    As far as a recall and etc. is concerned: Recall may not be significant to the bigger car manu's but for a small co. with a brand new technology in something as expensive as a car could be disasterous. Maybe not to fix anything but as publicity. Other car manu's would constantly point this out to their audience. Even though the fires caused no serious injury, the damage has been done and continues to pile on. With their latest report they presented non GAAP numbers much more prominently than GAAP numbers which is against the regulations or laws of filing those reports. Elon Musk may be a great innovator or visionary, but trying to see the outcome of a government probe using rose colored glasses will get you burned.

  • Report this Comment On November 20, 2013, at 1:59 PM, oTeslaManiax wrote:

    If there is any hope for EVs to be affordable for the mass, Tesla is the company that will make it happen. Elon clearly outlined the strategy years ago... make an expensive Roadster, then model S, then model X, then gen III... these expensive early models are financing the R&D and economy of scale of batteries for the gen III. So I do not understand the people trashing Tesla are for the rich. Yes, they are for the rich currently who are giving Tesla money to pave the way for EV mass adoption. So say thank you to the early adopters. Elon has always been upfront about this and asked for early adopters help. The Tesla trash talk people are the ones who want a freebie in life all the time. Some body has to pay. Thanks Elon, the current Tesla model S buyers and stock owners !

  • Report this Comment On November 20, 2013, at 2:02 PM, Blindnomore wrote:

    Another little bit of fact I found a minute ago:

    "Altogether, there are nearly 140,000 Leafs and Volts on the road, without a single on-road fire between them. Suddenly, three fires among 19,000 cars doesn't seem so impressive."

    Can't remember the publication but the title was "Is Elon Musk playing with fire?" Or something similar to that.

  • Report this Comment On November 20, 2013, at 8:24 PM, oTeslaManiax wrote:

    There are defects, warranty issues, recalls in everything you buy. If there is a design inefficiency, Tesla will fix it. Get over it people. Breathe. There is life beyond a warranty issue. Did any Nissan Leaf hit a tow hitch, run over it at 70 mph? If it was a gas car, the car would have flipped and killed the driver. I am just speculating like you people speculating the end of the world because of the model S fires. Get over it and go home and break your toaster on purpose and make it burn and see if life goes on.

  • Report this Comment On November 20, 2013, at 11:15 PM, Phrontrowalpine wrote:

    It is a historical fact that the largest manufacturers don't lead the market they are in, they follow, at best. Rome fell one day too. Look at all the small startups that crushed their massive competitors. A couple examples, Tempur- pedic just bought Sealy last year, and did you ever hear of a little nobody company called Apple? Can't wait for my 0-60 in 5 seconds SUV Tesla Model X. All other cars are hundred year old technology. boom boom bang pop

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