Why Investors Should Worry About the Chink in Tesla Motors Inc.'s Armor

Orders continue to pour in to Tesla Motors (NASDAQ: TSLA  ) for its electric vehicles. The company literally can't produce its cars fast enough. Tesla doesn't spend a dime on direct advertising, endorsements, or sponsorships, but word of mouth alone does a fantastic job of exciting consumers and accelerating demand. Despite this, Fools should practice caution because this story could end suddenly in a sudden stampede for one very particular reason.


Source:  Tesla Motors

Everybody take your seat
One great selling point that entices consumers and keeps them on the edges of their seats is the feeling that the cars are safe. Consumer Reports gave the Tesla Model S the highest ranking for safety it has ever awarded. Recall that both the German Federal Motor Transport Authority and the U.S. National Highway Traffic Safety Administration each conducted an investigation into the safety of the Model S. In both cases, no defects were found.

CEO Elon Musk and the company often boast that its cars have yet to see a single accident resulting in a death or major injury -- Tesla is the only auto manufacturer who can say that. This is despite, at last count, the total miles driven by its vehicles have surpassed 200 million. Musk put it well on CNBC when he stated, "People realize that our car is in fact the safest car on the road. It has the lowest probability of injury of any car."

Sounds great, right? For now.

The sold-out show
At the time of the Model S fires and the media frenzy that followed after, it seemed as though there could be no such thing as bad publicity for Tesla. The company went on to raise guidance and then still blast ahead of analysts' estimates for that quarter. Tesla had originally guided for "slightly under" 6,000 vehicles delivered; instead, the figure came in a hair under 6,900.

As usual, even though Tesla was able to boost production due to more key parts coming in than expected, demand was higher than Tesla's production could possibly keep up with. By all accounts, the car fires and the negative headlines failed to cool down red-hot demand.

Or did it?

Screaming fire in the crowded theater
During the most recent conference call, Andrea James of Dougherty & Company asked Musk if the "media firestorm" was measurable at all. Musk immediately responded, "Yes. So at first, we saw a significant drop in demand, and we were quite worried about it." Whoa! Significant drop in demand? Musk worried? Maybe Tesla isn't invincible after all.

Musk continued, "Consumers came to understand that this was really kind of a media-driven thing and not a real danger with the car, they -- our sales improved steadily since then and have continued to improve since that initial news."

Musk credits social media of all things for doing the job of helping the company recover. It's not like the company responded with commercials during the Super Bowl since, again, it doesn't pay for any advertising. However, the conference call was the first admission of a weakness in demand to the point of worrying management.

The dangerous stampede
To again quote Musk, "The fans are flamed literally by the media." That begs the question: What will happen when there finally is a death or a serious injury in a Tesla vehicle where there is any suspicion that it was due to a failure of the car's technology such as the battery, the software, or something else? As Musk points out, the problem isn't in any danger posed by the car's batteries but the flames fueled by the media. The response to the first major accident involving a Tesla vehicle could dwarf the previous "significant drop in demand" seen with the fires. Any panic by consumers would hit doubly hard because Tesla is actually producing supply at levels closer to meeting its demand.

Tesla is a crowded trade for which perfection is already priced in. Based on this year's current estimates of $1.80 earnings per share, Tesla trades with a P/E well over 100. Fools with only the highest risk tolerance should even consider Tesla as an investment. It may be one bad accident away from a possible crash in fundamental demand and a much cheaper stock price due to its ultra-rich valuation.

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Read/Post Comments (13) | Recommend This Article (7)

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 April 17, 2014, at 7:43 PM, zspeed74xr wrote:

    Or someone unfortunately dying may have the exact opposite effect as we will finally have a data point in the equation for exactly how much safer a Tesla is than the traditional gas guzzler. So far the only thing we know is that they either they are infinitely safer, or infinitely safer drivers drive them.

    Well played fear mongering though by the author and not including the other crucial statistic that actually matters here: Tesla is (currently) well ahead of the US average that hovers around 1 death per 100 million miles driven, with a recent low of .62 in 2011 and a recent high of 1.45 in 2005 according to my Googling.

  • Report this Comment On April 17, 2014, at 7:58 PM, SteveTG3 wrote:

    did Nickey Friedman really write this article?

    I have read her past articles on Tesla and they were quite reasonable and well researched. This article reads like pure FUD.

    Nickey, did the use of airbags face an uproar of public fury and falloff in usage the first time somebody died in a vehicle despite the airbag deploying? or with time, and occasional incidents of that nature have we been able to get a clearer picture of how advantageous the airbags are?

    are you suggesting that Tesla has simply been lucky and that you expect a flurry of accidents to take the incident rate of deaths for those in Tesla's vehicles from lowest of all automakers to worse than average? if so, what are you basing that on? if not, as far a I can see, this article is pure gibberish to any purpose other than your own personal motivations.

  • Report this Comment On April 18, 2014, at 12:55 AM, djtetsu wrote:

    Just my observation here but what's interesting to me is the year to year growth projections presented as reliable figures to work off of, the Gigafactory being completed in 2 years, also also presented as a reliable and a reasonable outcome. I thought that the Model X was originally presented as being possibly launched in 2013? Elon Musk himself admitted it was his perfectionist nature that delayed things. If the past is any indicator..

    Hitachi is hesitant in becoming a partner for the Gigafactory and Tesla knows nothing about battery production. They are also betting that they can reduce costs in areas of technology that they are not specialists in.

    All the while the Camarys and Accords are becoming better and better.

    So betting on Tesla, is a gamble. I don't own any shares but love love the car, the company, their leader, etc.

  • Report this Comment On April 18, 2014, at 4:25 AM, Batteryprof wrote:

    He is talking about global safety including electrical safety --> because of long charge electric and electronic components work much longer when in a normal car they work 2h / day average ...

    --> electric / electronic rialability that could disable some safety circuit ...

    and fast speed crash --> BYD taxi.

    Yes it might be a problem that comes when components get older ...

    This article is completly true.

  • Report this Comment On April 18, 2014, at 5:16 AM, deeageaux wrote:

    Every year Tesla breaks new ground.

    They knew nothing about making a car.

    Then they made the Roadster.

    Tesla knew nothing about mass producing a car.

    Now they are making cars at a rate of 700 per week.

    Several of the modifications to the Panasonic batteries are Tesla patents.

    I am sure Tesla will prove as capable at manufacturing battery cells as they are at manufacturing electric vehicles.

    Yeah, ICE cars get better and better.

    So do BEVs.

    Tesla is not standing still either.

    "Might" "Possibly" "Could be" is the essence of Fear Uncertainty and Doubt. FUD.

    But the facts are the facts.

  • Report this Comment On April 18, 2014, at 9:20 AM, dlwatib wrote:

    I'm not seeing that this article gave me anything to worry about. Tesla is still the safest car in the world.

  • Report this Comment On April 18, 2014, at 9:35 AM, drax7 wrote:

    GM gets recommended by most analyst, even after 13 deaths related to a defective component and a cover up, so now let us worry about teslas hypothetical deaths.

    If hypothetically 13 death were to occur at tesla, would that incite a bullish recommendation.

    I suggest never buy an emerging technology, cause the established way gets a free pass on incompetence and fraud.

  • Report this Comment On April 18, 2014, at 10:21 AM, damilkman wrote:

    I think people are overlooking Nickey's point. When a stock gets frothy and it is a momentum play, news, especially trivial news pushes and pulls the stock price. Something as trivial as Musk gets a hang nail can send the price spiraling down. Conversely any statement of future intentions sends it spiraling back up.

    The news cycle thus becomes the dominant indicator of the well being of the stock instead of the fundamentals. Anyone recall what happened to CRLA after Bill Clinton make a single sentence comment?

    The reality is this field is a bubble. All industries that have to do with the emerging technology of the EV field be it a pure electric play, hybrid play, hydrogen play, or vapid hot air play is priced to be the winner. Everything with a stock price is going to gyrate around on any news. There will be a couple winners and everyone else will lose their shirt.

  • Report this Comment On April 18, 2014, at 10:22 AM, LikeTesla wrote:

    If some future Tesla accident causing serious injury or death is a chink in Tesla's Armour then every other "major" auto manufacturer has a huge hole in their Armour!! Seriously? I've read through the whole article and still looking for something resembling a chink :-)!! Based on the number of crazy idiots out on the roads my guess is that eventually someone will manage to kill themselves while driving a Tesla! For various reasons the odds on that occurring may increase as Tesla begins producing less expensive vehicles on large scale ..., the mass market vehicle. I'm thinking the increase in that factor will not be governed strictly by there being more cars on the road!!

    Here is study published September 2011, by Argonne National Laboratory titled, "Modeling the Performance and Cost of Lithium-Ion Batteries for Electric-Drive Vehicles" which describes the feasibility of massive Lithium-Ion Auto Battery Factory that can produce 20,000 - 500,000 "Battery Packs" beginning in 2020 ..., pretty much the Tesla Giga Factory.

    Argonne Study: http://www.ipd.anl.gov/anlpubs/2011/10/71302.pdf

    If you read a peer review of this published study and take note of the individuals who conducted the review you will see a key Tesla Employee Mr. Kurt Kelty, Tesla Motors (formerly a key Panasonic Employee) listed with credentials that seem to imply quite a bit of knowledge on batteries ..., just to make a point!! A link to the peer review and excerpt of Mr. Kelty's credentials and industry background/experience follows.

    Peer review: www.epa.gov/otaq/climate/documents/420r12021.pdf

    Mr. Kurt Kelty, Telsa Motors

    ________________________________________________________________________

    Director,

    Battery Technology

    Tesla Motors

    3500 Deer Creek Road

    Palo Alto, CA 94030

    650-413-4077

    kurt@teslamotors.com

    Kurt Kelty is the Director of Battery Technology at Tesla Motors. His team is

    responsible for setting and implementing Tesla’s battery cell usage. He is particularly

    focused on evaluating the safety, performance and reliability of cells. His team then

    develops basic cell packaging concepts for modules to enable the safe and efficient

    packaging of the cells. Once the module and pack is designed, Mr. Kelty’s team

    validates the pack performance under extreme environmental conditions that might be

    observed in the vehicle application.

    Mr. Kelty is responsible for the technical exchanges and commercial negotiations with

    each of the battery cell suppliers. He also leads the battery pack recycling and regulatory

    efforts at Tesla. He is a member of SAE J2929 Electric and Hybrid Vehicle Propulsion

    Battery System Safety Standard to create abuse standards for vehicle battery packs.

    Mr. Kelty also leads the battery pack lifetime modeling and degradation efforts.

    Before joining Tesla, Mr. Kelty worked for Matsushita (Panasonic) for nearly fifteen

    years, seven of those years in Japan. At Panasonic, Mr. Kelty worked in various

    planning and marketing capacities related to Ni-MH and Li-ion batteries. During the last

    5 years, he founded and led Panasonic’s battery research lab in Silicon Valley and created

    R&D alliances between Panasonic and other battery and fuel cell developers in the U.S.

    He is the author of 12 patents

    Mr. Kelty received his B.A. in Biology from Swarthmore College in 1986 and his MSc

    from the Stanford University Graduate School of Business in 1997.

  • Report this Comment On April 18, 2014, at 1:38 PM, jackbdazzle wrote:

    It is not about whether or not a brand has a recall or a safety issue.

    It is how a company handles the issue, and does the company have enough trust to power through the problem.

    Tesla seems to understand how to handle PR or actual issues, and seems to have enough goodwill to power through any issue as long as they come up quickly with a resolution.

    everyone knows that their will be recalls. People just want to know that someone cares about their safety.

    Tesla passes all my tests. I think the Model X will be a huge success and will drive the stock price even higher.

  • Report this Comment On April 18, 2014, at 4:59 PM, Barmil wrote:

    "Why Investors Should Worry About the Chink in Tesla Motors Inc.'s Armor"

    OMG since when did you investors turn into nervous Nellie's.

    If you think you can maintain perfection you are delusional.

    Anything man makes is fallible,the trick is to minimize your exposure. Malcom knows this! Tesla is still a good bet.

  • Report this Comment On April 18, 2014, at 9:55 PM, rick2000a wrote:

    didn't the author mean to say" kink'? chink is a very derogatory slang! the writer should be more careful in choosing his words!!

  • Report this Comment On April 19, 2014, at 10:16 AM, harley1 wrote:

    It's just a matter of time before Tesla is part of the 27 club

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