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

Shares of Tesla Motors climbed in midday trading today, despite the EV maker being shut out of New Jersey. Here's what investors need to know.

Mar 12, 2014 at 4:12PM

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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Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of 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.

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