Why Investors Drove Tesla Motors Stock Higher Today, Despite the Recent Setback in New Jersey

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis. 

It seems that any news is good news when it comes to Tesla Motors (NASDAQ: TSLA  ) stock. Investors pushed shares of Tesla higher by more than 4%, to $244.45, in midday trading on Wednesday, despite the electric carmaker losing the right to sell its cars in New Jersey yesterday. On Tuesday, New Jersey's Motor Vehicle Commission passed a rule banning auto manufacturers from selling cars directly to consumers in the state. As a result, Tesla will be forced to stop selling its Model S cars in New Jersey as soon as April 1.

The Palo Alto California-based company currently operates two retail outlets in New Jersey, as well as a service center in the garden state. Unfortunately, New Jersey is now one of three states that have banned direct sales of cars. Deep-pocketed auto dealer associations in Texas, Arizona, and now New Jersey, have succeeded in imposing limitations on how automakers sell cars.

Reinventing automotive retailing
Traditional car dealers argue that Tesla violates century-old state franchise laws by selling directly to consumers. However, according to Elon Musk, Tesla Motors' chief executive, Tesla is pursuing a company-owned store and service center model because "existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars."

Source: Tesla Motors

These battles boil down to money. The New Jersey Coalition of Automotive Retailers reportedly spent as much as $155,000 "last year lobbying for the proposed rule," according to Gigaom. Tesla faced a similar battle in Texas last year when it lost the right to sell its cars in the Lone Star state. Not surprisingly, the Texas Auto Dealers group spent $2.5 million on legislative elections in Texas in 2012.

With these losses now behind it, Tesla faces similar challenges in states such as Ohio and Minnesota. Tesla met with the Ohio Automobile Dealers Association for the first time yesterday in hopes of convincing state lawmakers that it should be able to continue selling cars in Ohio. The EV maker currently owns and operates two stores in Ohio, and it hopes to open more stores there in the future. However, pending legislation could prohibit Tesla from opening new locations in the state.

These powerful trade groups claim that franchise laws actually protect consumers. Jim Appleton, the president of the New Jersey Coalition of Automotive Retailers said that "dealers protect consumers because an auto manufacturer is congenitally incapable of fully and faithfully honoring warranty and safety recall obligations," according to CNN.

This is a bogus statement. After all, what consumer actually likes the dealership experience? It is outdated, and often ends up costing consumers more through service fees and markups. Tesla Motors, on the other hand, has received the highest customer satisfaction score by Consumer Reports. In fact, all of the Model S owners I've spoken with say the company's service is the best car service they have ever experienced.

Ultimately, citizens of Texas, Arizona, New Jersey, and potentially other states, as well, are being robbed of innovative products and the right to consumer choice. Going forward, investors will want to watch for new developments in areas such as Ohio, Minnesota, and New York, as these states could be the next ones to ban Tesla sales.

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Comments from our Foolish Readers

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  • Report this Comment On March 12, 2014, at 7:04 PM, LoveMyTesla wrote:

    So this is good news for either Philadelphia or Connecticut, as they will get the sales tax from Tesla sales and deliveries! The beauty of fighting Tesla is that they bring more attention to Tesla. Tesla can still have their showrooms, but just not talk about pricing, like they do in Texas.

    Unfortunately, these car dealer lobbies have a lot of money and a lot of tax dollars in rural areas, so doubt Tesla will have much luck fighting them, even as their sales continue to increase.

  • Report this Comment On March 12, 2014, at 8:42 PM, EFRROS wrote:

    I will buy a couple of Teslas and will never buy another ICE car from any tyrant car dealers!

  • Report this Comment On March 12, 2014, at 11:33 PM, singaporenick wrote:

    The USA claims to be the land of free market capitalism,but it is far from it.Powerful interest groups control the economy through paid-up politicians.I reckon China is more free market capitalism than the USA.

  • Report this Comment On March 13, 2014, at 11:03 AM, oakjames wrote:

    I would like someone to provide me some clarifications.

    1) What happens if you bought a Tesla from CA and you are a resident of NJ ? Can you drive in the state of NJ ?

    2) After all these are machines ( Elctrco-Mechanical) and if you need service where do you take your Tesla for service, if you are not a CA resident ?

    3) Which insurance company insures TESLA ?

    4) Can insurance company have a disclaimer that if you hit a Tesla or get hit by a Tesla, and they will not pay for the damages ? Specially if you are in a Non-Tesla State ?

    Thank you

  • Report this Comment On March 14, 2014, at 1:42 AM, aacole wrote:

    Oakjames,

    1) I am sure that in order to register your car if bought out of state, you have to pay your registration fees (which include sales -or "use"- taxes in the state you register it in). So if NJ wants to collect those taxes, they will surely register the vehicles. If registered, problem solved.

    2) you take them to the closest service center, which should be allowed to operate, even if they are located in states in which sales are banned.

    3) I am confident insurance is available from the major carriers at a reasonable price for the TESLA, otherwise this would have been brought to the market's knowledge, given the blanket coverage the company has received in the past 12 months.

    4) Insurance companies do not offer insurance that require disclaimers that serve to nullify the very insurance they are offering. This would be illogical and unmarketable. Yet no problem exists (see answer 3 above.)

    These questions appear to me to be from somebody hoping that bad publicity will cause the stock to go down so they can buy back the shares they borrowed and pocket the difference. Oh well...

    No problem though. I have full confidence that TSLA will continue to perform excellently. Watch as this rule breaking company rocks the world of the petroleum-based companies that rely on the obsolete ICE technology for their profits. The end result will be a cleaner environment and a US based manufacturer of vehicles with a massive market cap.

  • Report this Comment On March 14, 2014, at 3:05 PM, FrankoJames wrote:

    Happy Pi Day

  • Report this Comment On March 15, 2014, at 3:59 PM, FrankoJames wrote:

    If you were to ask me, I would say that the market capitalization of Tesla could easily be matched to that of Volvo without much debate by any trader contemplating the placement of a trade on the open market, which to me is the collective conscious of all living people that are forced to financially interact together in life to justify the economical notion of opportunity cost. In other words, only time will tell if Tesla can continue to generate the cash flow necessary to complete with the major autos for the next 100 years as has been the case with companies like the Ford Motor Company. I hope you had a great Pi Day, which also happens to be Einstein's Birthday.

  • Report this Comment On March 15, 2014, at 4:00 PM, FrankoJames wrote:

    I have to GOGO, enjoy.

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