Join Motley Fool analysts Nick Sciple and John Rosevear for an extra-long monster episode of Industry Focus: Energy about the merry misfortunes of Tesla (TSLA 4.72%) and Wall Street darling/baddy Elon Musk -- from bull-baiting the SEC, to changing its business model overnight, to quietly ramping back autonomous-driving promises and plenty, plenty more. The hosts explain what all of these stories mean for Tesla on the surface, and why, when you read between the lines, the bull case for Tesla gets very hard to defend.

Regular listeners may have been wondering, "Where's the Tesla coverage? Everyone's talking about it, so why are you ignoring it?" Not ignoring -- just saving it up for today! Click play and dive into this very deep dive on Tesla's very busy last few months.

Check out the latest earnings call transcript for Tesla.

A full transcript follows the video.

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This video was recorded on March 7, 2019.

Nick Sciple: Folks, just wanted to let you know before you dive into this episode, this episode ended up running a little bit longer than we expected, talking about Tesla. Obviously, there's been so much in the news the past week and over the past few months as well. As quick as the news cycle is with this company, we really wanted to cover everything that's going on with the business so we didn't have to drop three Tesla podcasts over the next couple of months. Keep that in mind as you tune into this episode. Hope you enjoy my conversation with John Rosevear. Thanks!

Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today's Thursday, March 7, and we're talking Tesla. I'm your host, Nick Sciple, and today I'm joined by Motley Fool senior auto analyst John Rosevear via Skype. How are you doing, John? 

John Rosevear: I'm doing very well, Nick! How are you? 

Sciple: I am doing great and I am very excited to talk about Tesla today! This is a company that has been in the news so much in the past year, but in the past month especially. We've got confusion around European deliveries, issues on imports into China. You have the general counsel and the CFO leaving in the past few months. Elon Musk just got contempt charges from the SEC. And now, there's price cuts across their entire lineup of vehicles. And, they announced the Model Y reveal coming March 14th. There's just a lot of news to talk about. For our listeners, just want to signpost, this is going to be a long episode, probably one of the longest ones that I've done, and of the hosts of Industry Focus, I'm one of the longer-running ones. 

John, before we dive into this recent news about Tesla, I want to give Tesla and Elon some credit. Back in 2010, when Tesla IPOed, it was the first U.S. automaker to enter the market in 54 years. Came from a standing start at zero and it's up 10 times since IPO. When you look at the brand that Tesla's built and what they've accomplished so far, what stands out to you with their brand and how significant the growth of they've achieved in the past few years has been?

Rosevear: In the early days after Tesla went public, it was common for me to hear from readers, "Tesla is disrupting the auto business!" And I said, "Back up!" They haven't necessarily disrupted the auto business, but they have entered the auto business, and that is a really, really hard thing. We should give them credit for that. Just to be building cars beyond hand-built-in-the-garage level is a big deal. This is a fiendishly difficult business to enter at all, much less to make money in. They have certainly entered it, they've made a huge splash. Whether they're making money consistently yet or not, jury's still out. [laughs] But they've done a good job. They build cars that that their customers love, love, love. They've established a huge presence. They've influenced other automakers who are all of a sudden now scrambling to go electric, following Tesla's example, that electric cars don't have to be these miserly eco-minded things. They can be fun, they can even be better than their conventionally powered counterparts. 

All of that is huge. It's seismic. You could argue that he's already accomplished his mission to accelerate humanity's movement toward sustainable transport, toward electric cars rather than internal combustion cars. His influence is massive.

That said, that's somewhat separate from whether Tesla is going to thrive as an investment. That's the conversation here today. 

Sciple: Exactly. He really made EVs cool. In 2018, Tesla was over 10% of global EV sales. They've really made a significant move into the auto market. They tout their large amounts of autonomous data and their fleet of cars using autopilot. They have a network of superchargers. And at least until recently, they've built a robust brand of retail stores.

But in the past few months, the story around Tesla has changed. For the longest time, the questions around Tesla came on the issue of supply. Is Tesla going to be able to make the Model 3 at high quality and at scale? Tesla faced some difficult issues there. Back in November, Elon Musk said to Axios on HBO that during the ramp of the Model 3, Tesla faced "a severe threat of death. Essentially the company was bleeding money like crazy, and if we didn't solve these problems in a very short period of time, we would die." Of course, Tesla did seemingly solve those problems and has reached volume production. 

However, the recent questions around the company have to do with demand.

Rosevear: That's an interesting point. For years, the investment discussion around Tesla was, how quickly can they ramp up? How quickly can they make more and more cars? The question of, will people line up to buy these cars when they're making a million a year is now starting to come into focus a little bit. What's the real demand for these vehicles at their current state of technology, at their current state of market penetration, at their current state of the competitive universe? What is the demand? I wonder if we're now starting to see it, and that it may not be quite as unlimited as some heavy-hitting investors have assumed.

Sciple: Right. We saw Elon on the Q4 conference call say he thinks that "demand for the Model 3 is insanely high, but the inhibitor is affordability." Folks literally don't have the money to buy the car. 

Rosevear: Sure, but that's true of Ferrari, too. If Ferrari was building $20,000 cars, they'd sell a lot more than 8,000 a year, wouldn't they? [laughs] 

Sciple: Yes. When you take an economics class, it's how much demand at a given price point. The first thing we want to talk about today is the news that we got last week, announced on February 28th, that Tesla was going to make significant price cuts across the board on all its models of vehicles. We got the long-awaited $35,000 Model 3 as well as the Model S and X were cut from about $12,000 to about $8,000, and even more so overseas. In Taiwan, the price of the Model S P100D dropped by almost $100,000, which prompted protests in the country. Electrek quoted that some vehicles have been devalued as much as 40%. 

John, we have these questions about demand, and we see really significant price cuts across the board on all the models of vehicles. What does this signal for us as investors, this really abrupt price drop by Tesla? 

Rosevear: Well, clearly it signals that Elon is just now able to cut prices because their manufacturing is so advanced and he's doing this out of the goodness of his heart to speed the acceleration of adoption of electric vehicles! At least, that's what my Twitter followers tell me. The reality here looks a little different. It really does look like, from all of the evidence we can see, that Tesla knows that its early adopters all have their products, and the move into the mass mainstream isn't happening quite the way they'd hoped. So, now they've got to stir up demand, they've got to start to pull some demand levers and a very big, very aggressive demand lever is to cut the prices.

Sciple: Exactly. We saw in January and February significant declines in sales of the Model 3 from what we had seen at the end of 2018. To throw some numbers at you, in December, Model 3 sales were around 25,000. Those declined to 6,500 in January, and then a further decline to 5,750 in February. Those are the lowest sales of the Model 3 since around May 2018, when the Model 3 ramp was just beginning in earnest. On the positive side of this story, there is significantly more demand for vehicles in general in this lower price range than there are for these luxury vehicles Tesla has been selling. Demand for cars in the $35,000 price range is reported as 5X higher than cars placed $55,000 and above. So, there may be some demand there. 

What's concerning for me is the steps that Tesla has had to make to bring these costs down. What they have done is announced that they're going to close the vast majority of their stores. To quote directly from Tesla's blog post announcing this, Tesla says that "to achieve these prices while remaining financially sustainable, Tesla needs to shift sales worldwide to online only." They'll keep a small number of stores in high-traffic locations as galleries, showcases, and Tesla information centers, and we're going to reassign or lay off retail workers. This is the third round of layoffs that Tesla has announced in the past six months. There was a 7% workforce reduction in January primarily targeting delivery sales and Model S production employees. There was another round of layoffs in 2018. 

John, as we see, Tesla has really touted these retail stores as being a significant driver of demand for the Tesla brand.

Rosevear: Of course, the most bullish investors tell us, it's just like the Apple Stores, as part of their argument for why Tesla is this disruptive company. They're getting out there with this very polished retail presence that they control end-to-end rather than franchise dealers like other automakers. And this is an important part of the story and an important part of upselling their customers. Rather than buy the Model 3, why don't you buy a Model S? Oh, you're buying a Model S, maybe you want a Powerwall, maybe you want a solar roof, this kind of thing. This has all been part of the story. And now, poof! It's gone.

Sciple: Right! Just to call out how abrupt this swerve has been, in Q4 of 2018, Tesla opened 27 new retail and service centers, the most it had ever opened in a single quarter since 2017. They called out in their 10-K, published nine days before this price cut announcement and the announcement they were going to cut all of their retail locations they said that their Tesla stores and galleries are highly visible premium outlets in major metropolitan markets; opening a service center in a new geographic area can increase demand; and, they had plans to more rapidly expand their retail footprint. Of course, that's on an SEC filing under oath nine days before this announcement. You'll see in all of these SEC filings this phrase that the statements in that filing reflect the current expectations of management. 

Why have management's expectations shifted so abruptly in a less-than-two-week period? 

Rosevear: I think Elon got the mid-month sales report in February. [laughs] I really think that's probably it. They gave him the update and said, "Boss, things aren't going so well." And he's like, "Whoa! We've got to do all these things now. What do we have to cut to get the $35,000 Model 3 out now?" or whenever it was earlier in February. 

I think it's really seat-of-the-pants here. You were saying something before we started recording the show about building the aircraft while it's in-flight. [laughs] There's a sense of that. I mean, there's always been a sense of that with Tesla to some extent. It's still kind of a start-up, even though it's, what, 16 years old now or something like that. And there's a real sense in the last couple of months that Elon is winging it, and that he's winging it very quickly. "We're going to do this. We're going to do this." It's these major changes that shift the business and effect hundreds or thousands of employees and contractors and suppliers and so forth, that have all of these repercussions way down the chain. And he's just reacting.

Sciple: Right. We'll talk about this later, too. Even the call to announce this was rushed. It was a call to selected reporters, was not open to the public. 

Rosevear: Was not open to a lot of people who cover Tesla on a day-to-day basis. It was a small invitation list, and they left off some surprising names. I wasn't on the call, but I mean, people who Tesla is part of their beat were not on this. It was a little surprising. They were looking for a very particular audience. [laughs] 

Sciple: Right. They announced revised Q1 guidance, they wouldn't be profitable. All these in the same week that the SEC filed contempt charges against Musk for flaws in Tesla's communications. We'll talk about that a little bit later. 

Continuing on about the retail strategy, one question I have is a big part of Elon Musk's master plan has been to build out both these electric vehicles with complementary solar services. In selling the solar products, Tesla has repeatedly cited the importance of these retail locations to sell solar products. So when they announced the Solar City merger, they said they were trying to build an integrated product that you could just walk into a Tesla store and just get the solar panels, and it all just works. 

Rosevear: In fact, this was a big part of how they sold the merger to shareholders. That was the vision. This was the whole thing.

Sciple: Right. Again, going back to what Tesla reported in Q4, they reported their lowest number of installed solar systems in five years. In explaining the issues that Tesla had had in selling volumes of solar panels, they said, "We are still in the process of transitioning our sales channel from former partners to our Tesla stores and training our sales team to sell solar systems in addition to vehicles." So, if the reason the solar business wasn't doing well was because the retail store employees had not been properly trained to sell the solar products, now that these retail store employees are no longer going to be employed by the company, how does Tesla plan to sell its solar products?

Rosevear: This isn't the thing you can sell online. [laughs] It just isn't. These are expensive, elaborate systems. They involve teams of people coming out to your house for several weeks. This isn't trivial stuff. This isn't a car, this isn't a pair of shoes. This is something pretty major. I don't know how you sell it online. I don't know that they're going to sell very many online. I don't know if they're going to sell any online.

Sciple: Yeah. It's definitely going to be a story to continue to watch. There's also been reports out of Gigafactory 2 in Buffalo that they've been facing a lot of issues when it comes to production. 

Rosevear: We have to explain what the Gigafactory at Buffalo. It's a solar panel factory.

Sciple: Sure, do you want explain that for our listeners?

Rosevear: It's where they make the solar panels. The idea was, they got funding or tax breaks or something to build this factory in Buffalo, New York. It was going to crank out these advanced solar roofs that Elon demo-ed around the time of the Solar City acquisition as part of the case for this. This factory -- well, you were about to say, go ahead -- it's having some issues. 

Sciple: Yeah, it's had some issues. These are reports from the Buffalo News and local reporters. They're talking to employees at the factory. Production has been not ramping up in any significant way over a long period of time. Employees have been watching videos on the job. The culture there around that factory has really been poor. Really, a lot of question marks. We're actually seeing some New York politicians raising some questions about what's going on at that Gigafactory in Buffalo. So, when it comes to the solar business, this change to both the retail strategy as well as what's going on at the factory raises a lot of question marks as to what role that solar business is going to play for Tesla going into the future. 

Outside of the solar business, there's some questions about how Tesla is going to sell their cars. When they announced this move to all-online sales, Elon Musk called out that 78% of Model 3 orders had been made online, and 82% of those had been made without a test drive. However, it's worth noting that the Model 3 wasn't in many stores. It had a very limited test drive fleet in 2018. And, it doesn't account for customers that may have gotten their first exposure to Tesla in the store and may have purchased. There's been some really strong anecdotal evidence both on Twitter, and I think one employee at The Motley Fool, that Tesla salespeople have been a huge part of pushing folks that are reservation holders to finally come through and make these orders.

Now that these employees are no longer there, what effect, if any, do you think the absence of Tesla stores will have when it comes to driving purchases for the Model 3?

Rosevear: Let's back up for a second and talk about this as a business model. We've talked about this in the past, how new technology becomes mainstream. It starts with early adopters. Then, at some point, it has to break out into the mass market. There are social scientists who have documented this and offered theories for this. There's a point popularly referred to as Crossing the Chasm, where you cross from the hardcore early adopters into the mainstream mass market. The stores were how they were going to do it. I'm often in New York City, there's one store I walk past all the time. It's near an Apple store. It's near a big Starbucks. It's near a Google location, where a lot of Google employees work. It's very well-situated, it's in Chelsea, around the West Side. You start to see well-heeled, tech-oriented mainstream folks walk by the Tesla store, and they walk in. This is how they start to bring new people into the fold and so forth. If it's all online, how does that work? Are they relying on word-of-mouth from their hardcore enthusiast donors to cross the chasm, to get into the mainstream market? I don't know how this is going to work.

Sciple: Right. It's worth noting that in the past few months, Tesla's radically cut back its referral program, which would be the case that, "Hey, our existing owners are going to drive sales." Without those incentives there, they may be less incentive to do those sorts of things. 

The other question mark has to do with, in eliminating these test drives, what Elon Musk has called out as making that possible is this new return policy that they're going to have for these vehicles. If you purchase the vehicle, you can drive it for up to seven days or 1,000 miles, and if you don't like it, you can return it for a full refund. Elon has said, "we're going to make it super easy to get a refund. People really shouldn't be concerned about placing an order or thinking there's not reversibility. We want to make it incredibly easy to get a refund." However, given Tesla's track record on refunding people their deposits and purchases, can we really trust Tesla to refund these purchases properly? What do you think, John?

Rosevear: There's a whole another issue here, which people haven't been talking about so much, related to the refunds. You put 1,000 miles on a car, it's worth less than it was when it was new. Who takes that depreciation hit? They're going to make the refund and take that depreciation hit, and try to sell the car used? Are we going to have a pile of Model 3s hitting auctions? What is that going to do it a residual values? Used car pricing? Their abilities to do leasing when that comes up?

Also, as I know that you've said in the past, and perhaps you can expound on this for us, Tesla hasn't been so good about giving the refunds. 

Sciple: Right. We got reporting out of CNBC. Reporter Lora Kolodny, in the past month or so, spoke to more than a dozen Tesla customers. We'll drop a link to this article in the description of the podcast so our listeners can take a look at it for themselves. She reviewed their correspondence with the company and their financial records. The issues are really surprising for a company as big as Tesla. Bounce a $1,000 check for a refunded reservation fee. You had Tesla, instead of refunding the reservation fee, refunding the full $40,000 that someone paid for the car. You had people getting repaid but getting no communication or notification from Tesla. Those sorts of things are taking place. In the most extreme cases, we've had customers waiting weeks or months to get refunds in excess of $10,000. The customers cited in that article talked about repeatedly communicating with Tesla sales staff and those sorts of things to try to get those issues resolved. However, with those sales staff getting laid off in significant ways across the board, I think it's reasonable to question whether these issues might not only not improve, but may deteriorate as the staff that is there to service customers no longer works at the company. What are your thoughts on that, John?

Rosevear: Best case, these anecdotes speak to either poorly trained staff or poor systems. They aren't able to just log into the system and click refund and the check automatically prints and mails. They've got some issue going on. Worst case, maybe there's a policy to stall on refunds as long as possible to keep Tesla's cash balance as high as possible, especially around quarter-end when they have to show it to the world. I don't know. Again, best case, this is not the level of organization we expect of a 16-year-old, $50 billion company. Worst case, there's shenanigans going on here. And it's very strange.

Sciple: Definitely something to watch as refunds become a more significant part of Tesla's selling strategy than even they have been to date.

The other question that popped up to me when we look at all these stores that are going to be shut down is, there's going to be a lot of costs associated with this. It's going to be a really complicated financial transaction. You're going to have to cancel all your leases with malls. Just since the beginning of March, they've closed 32 stores. We've seen several mall-related businesses trade down as a result of Tesla's announcement. Then, you've got severance pay for store workers. If you're going to lay off a large number of these workers, you're going to have to pay them severance. And there has been some reporting that Tesla is making moves to maybe try to encourage these workers to quit rather than being laid off. There's been some reporting that Tesla has eliminated all bonus compensation for their retail staff. Those bonuses represented the majority of their income. What are your thoughts on that, and thoughts on the complexity of this transaction for Tesla?

Rosevear: That this is a strategic move that was not fully thought out, and that the company's cash strapped. [laughs] Which is consistent with everything else we've said so far, right, about the current state of Tesla. If Ford Motor Company lays off a bunch of people, they pay out the severance and then maybe they take it as a one-time charge against earnings so that it doesn't go to their adjusted income, and they can say, "This is a thing that happened. It's not an ongoing thing." And investors roll with that, and say, "OK, we see that." If Tesla is worried about to its quarterly report, that's one thing. But it seems almost like they're holding onto cash as tightly as possible here. It's really weird. [laughs] I mean, it's weird, except that that context explains it.

Sciple: Right. One last thing to mention, Deepak Ahuja, Tesla's longtime CFO, he had two stints at the company, abruptly resigned on the last quarter's conference call. We now have a new CFO at Tesla that's going to be managing this really complicated financial transaction, Zach Kirkhorn. 34 years old with no CFO experience. Does that raise any red flags to you, or concerns, given that someone with less-than-ideal experience will be navigating these transactions, getting all these leases off the books?

Rosevear: I do wonder what's going on here. I mean, I don't know Zach Kirkhorn. He may be very sharp. He's probably very sharp. He's probably sharp enough to impress Elon. That doesn't mean he has the experience or the knowledge to do this. I don't know who on his team might have it, given the high turnover in the finance department at Tesla. Deepak's departure was just crazy. It was a drop at the end of the conference call. "By the way, I'm leaving. Bye." [laughs] You know?! It was almost that. Here, we're having our quarterly conference call, and, by the way, I'm gone. See ya. Did he decide that earlier that day? What happened here?! What is the story? We don't know the story yet. Nobody's managed to report it out. 

But, we know where all this points. This is a company that is flying by the seat of its pants, with a CFO who may be in way over his head in terms of hard business finance questions, who is improvising in a situation where there may be a serious cash crunch that isn't readily visible to us.

Sciple: Right, John. That's what I wanted to ask you. With as complicated and abrupt as these price cuts have been, and eliminating the retail stores that had been a really key part of both Tesla's solar and mass-market strategy, why is Tesla choosing this route rather than raising cash via debt or equity to finance the company as it overcomes at least the demand problems that they're facing today? Why is Tesla not raising money?

Rosevear: The community of Tesla skeptics on Twitter and elsewhere is convinced that for some reason, they can't. That the SEC has told them privately that they would have to disclose something or they're blocked somehow. Or, maybe, alternatively, that the banks who have led their funding rounds in the past have said, "No, you have to show us profitability. We can't go back to this well." Or, you run the serious risk of trying to do a $2 billion raise or whatever it having it be undersubscribed, which is not going to support your stock price, if that happens, to say the least.

Sciple: Sure, John. Let's transition now to talking a little bit about what's going on abroad. At the end of the last quarter, Elon called out that there's going to be significant demand in Europe and China for these vehicles. In this conference call last week, I mentioned that Elon updated guidance, saying they don't expect to be profitable in Q1 both due to the restructuring of their stores and the layoffs having to do with their retail locations, but as well with challenges getting cars to China and Europe. Let's talk a little bit about what's going on in China and Europe.

Recently, we've seen news in China having to do with import issues there with customs. Do you want to explain that a little bit to our listeners? What's going on in China?

Rosevear: China suspended imports of the Model 3s. Their customs inspector said there are irregularities, including things that were labeled incorrectly and so forth. They cited problems with 1,600 cars. There are a whole bunch that are still being held. The Chinese officials did agree this was something that Tesla could fix on-site, in the port, in the impound area, wherever the cars are being held. Tesla is apparently doing that under the eye of the customs officials. They'll be able to import, the clearances will resume, once they get this straightened out. 

But, as always in China, we wonder if there's a little deeper thing going on here. [laughs] What that might be is, did Tesla not have the right agreements with the right officials to bring the cars in? Did Tesla leave off something obvious that has raised the ire of some leadership of the customs people or something like that? What's going on here? 

Sciple: Right. It could be as innocent as, there's been reporting in the past couple of months that Tesla was really rushing to get their vehicles onto boats and shipped off to China in fears that as President Trump's delay of increased tariffs on China took place, there were some fears that they might not be able to get the cars there before there's tariffs bumped up. So, it's possible that Tesla, in their rush to get those cars on the ships --

Rosevear: As we've seen elsewhere in our discussion here, Tesla is not always the most organized, meticulous company, especially with one of these Elon-on-the-fly kind of things. It might just have been exhausted people working 18 hours a day to get these cars on the ship, and on their way to China things were missed. Things weren't communicated. Things like that. It's entirely possible that that's what's going on. It's also entirely possible that because of some of those same factors, they didn't get their story straight with China. They didn't understand exactly what they needed to be doing to bring them into the country. They didn't have the agreement from the customs officials that would be overseeing this. Whatever. Some breakdown has obviously happened. It might just be -- in fact, it probably is, Occam's razor suggests it's just because of Tesla's tendency of doing things on-the-fly, quickly, at the last minute, under stress, and so forth.

Sciple: Yeah. Regardless, definitely something to be aware of for investors, particularly with the significance of China as a market for Tesla moving forward.

Another part of the China story for Tesla has been the construction of the Chinese Gigafactory that Elon has been touting over the past few months. He said in the Q4 conference call, "We really need to bring the Shanghai factory online. It's the biggest variable for getting to 500,000-plus vehicles a year. " They need the Shanghai factory to achieve at 10,000-a-week run rate and have the cars be affordable. Do you have something to say about that, John?

Rosevear: 10,000 car rate. 10,000 cars a week is the long-held goal. "We're going to build 10,000 Model 3s a week." But they need the second factory to do it because they can't do it in Fremont.

Sciple: Sure. The question mark that we've seen around this Chinese factory is that this has been touted as something that Tesla is going to construct. But we still have not seen financing announced for this factory. Tesla has said that they're going to have the factory under construction this summer. There's been a report from Reuters from a Shanghai official that the construction of the factory -- at least, the factory itself, without the machinery in it -- would be completed in May. What, if anything, do you take from the fact that we have not seen any announcement from Tesla when it comes to how this factory is going to be financed, particularly because it's currently under construction?

Rosevear: I don't get it. [laughs] And I seem to be saying that a lot. I fear our listeners are like, "God, this Rosevear guy's an idiot." But I've been looking at this company for years, and there's a lot of, we haven't heard the whole story yet. There's something here that's not right. That's what we keep saying over and over here. There is somebody who is in the area in Shanghai who has been taking pictures of the site. We've seen it go from a mud pit. They've built workers barracks now where they're going to bring in workers who will live on-site and build it maybe around the clock, for all we know. It's not implausible that if they mount a full-blown effort and do build around the clock, they'll have the building up by May. It's not implausible that if they mount a well-organized, full-blown effort, they will have machinery in place by the end of the year and be able to crank out a few cars before the end of 2019. 

Neither of those things will be cheap, even in China. And, as you've said, we don't know who's paying for this. We don't know how this is being financed. Tesla has never released an 8-K saying, "We've got funding for this." What deals have they cut to make this happen, and with who? What have they given up? We don't know.

Sciple: Right. There is a lack of transparency that, to me, is concerning. We saw on the Q4 conference call, I believe, CFO Deepak Ahuja had mentioned that they had received attractive financing offers from local Chinese banks. But, again, we still haven't seen announcement of that financing. Something I've been watching out for in the past month or so, and a thing we're continuing to wait on.

I want to transition now to what's going on in Europe. Europe has faced some import issues of its own. The first issue I want to call out is, right off the bat, the first week into European imports, right when the vehicles were coming off the boat, Tesla had hired a company called ICO to handle getting those vehicles unloaded from the ships and preparing them for delivery to distribution centers. However, less than one week into those imports, Tesla fired ICO and decided to take over those duties, at least the duties when it comes to prepping the vehicles for delivery to Tesla distribution centers, take that over itself. Does this raise any concerns for you, John? It seems to me, these types of services are something you'd want someone who specializes in this sort of thing doing. What do you think about the idea that they fired their import agent less than one week into importing vehicles into Europe?

Rosevear: Again, there's a story we haven't heard. It could be as simple as, Tesla didn't like the way the company was prepping the cars and decided to do it themselves. Maybe the first dozen arrived dirty or something. I think Elon was onsite for a day or two here, and it's possible he said, "No, you guys aren't doing it right. We're just going to do it ourselves from now on." It's also possible that there was some financial thing, that this company said, "We need payment for the first three months in advance because of your uncertain financial condition," and Elon said, "No, we're not doing that. Go away." [laughs] I don't know. There's a story here and, again, we don't know it. But it is a little odd. I can come up with several semi-reasonable explanations for why they might have chosen to do this. Certainly, Tesla preps cars for delivery in the United States to its own customers. It knows how to do this as a company. Whether it's got the people on the ground near the port and so forth to do this in Europe, I don't know. I would think that would be something that would be doable fairly quickly, though. But, again, we don't know quite what happened here. 

Sciple: Sure. Moving on to some additional issues we've seen. They've had delayed type approval of their vehicles in Europe. At least the early deliveries of their vehicles had to have autopilot disabled. We've seen German regulators require Tesla to change how it shows its pricing on its website. They claimed that the fuel savings that Tesla was reporting were unclear and misleading for consumers. What are your thoughts on both of those regulatory issues that Tesla has faced on importing its vehicles into Europe?

Rosevear: Tesla's use of fuel savings has been unclear and misleading in the United States for years. German regulators are tougher about that kind of thing than American regulators. [laughs] Yeah, I remember when the Model S launched, they were assuming gas was $5 a gallon or something like that at the time, when it was not. But because gas prices are always going up, it will be over the life of the vehicle, was what somebody said at the time. 

To some extent, this is just, "We're entering a market for the first time. We're doing this by the seat of our pants. We haven't hired people who are experts to advise us, we haven't spent months and months planning this carefully," which is, to some extent, typical Tesla, certainly in recent times. Ready, fire, aim. We're just going to ship into Europe, and we'll figure it out when we get there, let's go. So, on one level, I don't make that much about it. This is Tesla bumping into regulation in a market that it's newly entering where it hasn't done all of the research, dotted all the i's and crossed the t's beforehand. Which is Tesla, and which is not necessarily bearish for the stock in and of itself. If you assume they'll figure it all out eventually and everybody gets their cars in a week or two, then it's really no big deal. But it's just more typical what we've seen over the company in recent times.

Sciple: Sure. Another thing for Tesla investors to watch.

Now I want to transition into talking about the Model Y. On Sunday, March 3rd, three days after this conference call to announce the $35,000 Model 3, Elon announced via Twitter that Tesla would unveil the Model Y SUV on March 14th at Tesla's LA design studio. The first question I have for you, John, this, again, seems to be rushed, given that you had a Thursday announcement of very significant changes to the business that were concerning. The stock price traded down in a significant way the following day. Why was the Model Y not announced until Sunday following this big announcement on Thursday? Any thoughts there? 

Rosevear: It is possible that this is another example of Elon flying by the seat of his pants. What has been going on in the rest of the auto industry this past week is the Geneva Motor Show in Geneva, Switzerland, which is the big European auto show. The theme here is electric vehicles. There are a lot of them being showed. Audi just showed an electric crossover SUV one size down from the e-tron that they're going to begin building before long that is aimed squarely at what we think the Model Y is going to be. It's the same kind of vehicle. It's the same size. It's Audi's execution. They're building it on the Volkswagen Group's mass-market electric vehicle platform, so they'll be able to keep costs down and either deliver it at an aggressive price or make it nicely profitable for them, possibly both depending on trim level. They're clearly out to get Tesla with this.

Volvo, with its corporate parent, Chinese automaker, Geely, has launched a brand called Pollstar, they just announced a similar product, an all-electric crossover SUV that, again, is coming right at the Model Y's territory. It'll be built in China. That will help keep the costs down and so forth, and exported. This could be a very powerful contender. Yes, it's a new brand, but when I look at it, I see a Volvo. Volvo's reputation for safety and so forth is very strong. That will help sell them. Mercedes has the EQC, a compact crossover SUV coming that's all-electric.

This might just be Elon saying, "Our competitors are getting out there before we are in this important, important, important model segment." Compact crossovers, especially upscale ones, have been booming in sales all over the world. It might just be Elon saying, "We have to show something so that we can pre-empt people who might be placing reservations on some of these other vehicles now or soon." In that sense, it might just be, again, him reacting to something and improvising a solution on the fly. "Let's get this thing out there. Let's put together something we can show people. How long do you need to put something together that we can show? Two weeks? Let's do it!" [laughs] It might have happened that quickly. 

Sciple: Right. When you talk about the demand for these compact crossovers, on the Q4 conference call, Elon when talking about the Model Y says he expects demand to be maybe 50% higher than the Model 3, maybe even double. The question I have for you, John, we just had the long-awaited $35,000 Model 3, which a large number of deposit holders had been waiting for a long period of time. With this new Model Y coming out, how will the reveal of that car affect appetites for people to buy this $35,000 Model 3, knowing that this Model Y SUV, very popular among consumers, will be reaching market soon? Do you think there's any chance that the Model Y will cannibalize demand for this new $35,000 Model 3, and the price cuts across the board on Tesla's vehicles?

Rosevear: Depends. How quickly are they going to get out a $35,000 Model Y? If I've been waiting three years for a car, I don't want to wait three more years for the for the mythical $35,000 Model Y. At some point, I'm going to go buy something else because I need a car. [laughs] I'm going to reup on the Prius and maybe get the next Tesla or something like that. A lot of these people who got on that pre-order list for the Model 3 seem to have been people for whom a $35,000 car is a stretch. They're young folks, they're folks who are not employed in high-paying, high-tech jobs. They do other things with their lives. And they were maybe counting on the federal government incentives, which are now fading down, and some other things to be able to buy this car comfortably. And now, OK, it's here, and we're starting to see it. I don't know how many of them are going to transition to the Y.

With a normal automaker, sure. We'd say the crossover is going to way outsell the sedan right no, that's a no-brainer. With Tesla, I don't know. If we're still working with a core group of early adopters, how many people are going to reach into their pockets again? How many people are going to reach in for a Model Y? Given how the Model 3 rollout has gone, where it took much longer to get to market, it cost more... sure, the reviews of its handling and acceleration are great, but the car has had other problems, assembly problems, problems that suggest it wasn't fully tested in winter conditions, and so forth. You've got Consumer Reports wavering on it and so forth. I don't think they're going to get 400,000 pre-orders, real, genuine, honest-to-goodness customer pre-orders, for the Model Y, right now, especially given growing economic concern around the world. That's another thing we haven't even talked about. Auto sales are cyclical, and it's late in the cycle. That will be true of Tesla, just as it's true of Ford and BMW and everybody else. 

People who are looking at this and saying, "They'll have a million pre-orders for the Model Y," it's not happening. It's not. I don't know how the market will react to the Model Y. It's possible that they'll show the Model Y, and the market will go, "Alright, call us when it's closer to production." Or, that's what most people looking at it will say. "Alright, we'll see." We've heard a lot of promises from Tesla that don't necessarily translate into the production of vehicles.

Sciple: Sure. On the topic of production, the other question there is where is the Model Y going to be built? In the Q4 press release from Tesla, they had said it's most likely going to be constructed at Gigafactory 1. However, some reporting speaking to folks inside the plant have questioned whether there is room for another production line along with the X, S, and Model 3 production lines in the Fremont production factory. Before we started taping the show, you had mentioned a story that came out maybe 20 minutes before we started taping, John, related to that. Where is Tesla going to build the Model Y? Do we have any idea where that's going to take place?

Rosevear: If Tesla were a normal automaker that followed normal automaker practice, it would be a no-brainer. They'd build it right on the line with the 3, and they would vary the proportions of Ys and 3s coming out of the factory every day in alignment with what they were seeing in trends in customer demand so that they were ready to go. That's how other automakers do this. 

I assume, because it is the way that would make sense, that the Model Y is built on the same platform or architecture, as we say. It shares many of the same underpinnings. The industry lingo for this is a new top hat. You have the vehicle architecture, which is where most of the engineering effort and cost goes. Then, you have the body you put on top of it. To put a crossover SUV body on an architecture that was developed for a sedan is not a complicated undertaking if you've designed it all from the beginning with that in mind. I mean, it's horrendously complicated, but it's an established practice. It's relatively straightforward to build them both on the same assembly line. You do need some new tooling and so forth to make the body parts, to make the different interior bits, or to buy them, or places to store them if you buy them, and you need some additional training for the employees. You may need to reconfigure things a bit in the factory. If they were planning the Model Y from the beginning of the Model 3 program, it would be a straightforward exercise.

That said, it appears from their comments and from what we're hearing in recent days that it's not going to go that way. So, where are they going to build it? I don't know. It's interesting that they were going to build it in Nevada, where labor costs may be fairly inexpensive, certainly compared to California, and regulations are lighter. But, is there a pool of established automakers and so forth? Can they hire enough people? Can they train them up in time? How long does that take? What does Panasonic, their manufacturing partner at the Gigafactory, have to say about all this?

Again, it speaks to Tesla, or Mr. Musk, perhaps, making announcements before things have been thought through. I don't know. They may not know yet. They may just say, "We have to show the thing right now and start taking pre-orders." For all I know, they're going to end up building it in Shanghai and shipping it to the United States. I have no idea if that's actually how it will go, but it's a plausible solution right now if they do get that Shanghai factory built. I don't know. Nobody knows. Again, there seems to be no plan.

Sciple: We saw the Model 3 being built in a tent. That's always an option. [laughs] We'll see what happens.

Rosevear: Going to need a bigger tent. [laughs] 

Sciple: [laughs] Yep. Let's transition to talking about the other news that came out from Tesla last week, which was the SEC recommending that Elon Musk be held in contempt of court. For our listeners who aren't familiar with what contempt of court is, being in contempt of court means either misbehaving in the courtroom or, in this case, deliberately disobeying a court order. The court order that's relevant for this case for Elon and Tesla, I'm sure everyone remembers back in August, Elon's $420 go private #fundingsecured tweet, which led him to be charged with securities fraud by the SEC, and which triggered the settlement that is relevant in this contempt of court case.

Rosevear: We should note, that's a civil charge, not a criminal charge, by the way, when they say securities fraud. It comes out of a set of securities rules. It is serious. It's not go-to-jail serious. It's pay-a-big-fine serious. Just to clarify that.

Sciple: Right. To put some numbers on that fine, both Tesla and Elon Musk were tasked to pay $20 million in penalties each. The relevant part of that settlement agreement that's at issue in this contempt of court case is the agreement that Tesla would put in place controls over Elon Musk's Twitter that would pre-approve communications. This contempt charge arises from a Twitter post Elon Musk made a couple of weeks ago that Tesla would make around 500,000 cars in 2019. This was materially different from the 400,000 target set at the end of January. And, it was not vetted prior to being released. Elon had to correct that tweet subsequently after consultation with Dane Butswinkas, Tesla's since-departed general counsel. Changed his tweet to say, "Meant to say annualized production rate at the end of 2019 around 500,000."

The SEC in their complaint has said, "Elon once again published inaccurate and material information about Tesla to over 24 million Twitter followers, including members of the press, and made this inaccurate information available to anyone with internet access." Again, SEC said in its motion that Elon had not made a good faith or diligent effort to comply with the settlement, citing Elon's on 60 Minutes, where he said he did not respect the SEC and acknowledged that he did not have his tweets reviewed prior to releasing them, and that "mistakes may be made," and also cited a tweet in October where Musk mocked the SEC, calling it "the short-seller enrichment commission." 

As we look at all these SEC issues surrounding Tesla and Elon Musk with regard to this contempt charge, what concerns, if any, should investors have?

Rosevear: That they might say he can't be CEO for a while. [laughs] They have the power to do that! "You can't be director and officer of a public company for X years." We call that a DNO ban in the business. That's a penalty that can be doled out. It depends on whether the SEC politically feels it prudent to go gently on Tesla because of its prominence or to make an example out of him. As he pushes his luck, that argument is going to tend more toward making an example. I don't know if were there yet, but we may find out. 

At minimum, there will be something coming down on Elon. It might just be another fine that sounds big to you and me but is small with Tesla backstopping Elon's fortune. Maybe the very worst case, though, is they can say, "Alright, we're throwing the settlement out. Now we're going to prosecute you." [laughs] "Now we get into criminal securities fraud. We're going to come at you." [laughs] "And, by the way, let's send over an FBI team and start digging through your records at the Palo Alto headquarters and see what we find in the finance department." That would be a very difficult situation for Tesla and for Tesla investors hoping that the stock price stays lofty. [laughs] 

Sciple: Right. The options available to the SEC at this juncture are really anything in the grab bag. You mentioned the DNO ban, a fine, which is definitely going to be higher than the $40 million doled out previously. Something to watch.

The other question that I had arising from Elon's tweet and the follow-on from the contempt charge is, what exactly is Tesla's production guidance? We have a few figures floating around here. In Tesla's 8-K and fourth quarter update letter, they forecasted 360,000 to 400,000 vehicles produced. However, in that conference call Q&A for that same quarter, released on that same day, January 30th, Elon announced a target of 350,000 to 500,000 vehicles. However, on the tweet on February 19th, Elon said they were going to produce around 500,000 vehicles. Then, again, on the follow-up tweet on February 19th, he said they were going to produce about 400,000 vehicles. Then, on February 25th, Elon again went back to this 350,000 to 500,000 number quoted on the Q4 conference call. And then, on February 28th conference call, Elon announced a production guidance range of 420,000 to 600,000 vehicles produced. 

So, we've got three or four competing numbers announced in the past month and a half from Elon Musk and Tesla. Do we have any clear picture of what the production guidance is for Tesla in 2019?

Rosevear: You just gave the production picture for Tesla in 2019, [laughs] as they see it. No, of course we don't. There are so many variables in here. What is demand for the Model 3, really? What's happening in China, really? What's happening at the Nevada Gigafactory, really? It's hard to see. Again, what I'm taking from this is, "We don't know, we haven't done a detailed analysis, we're flying by the seat of our pants." That's one thing for a start-up with 12 people, it's another thing for a company like this. It's just the thing we've been saying over and over today. They're unorganized, they aren't meticulous around communications, certainly, as well as other things we've seen. 

Elon says, "We're going to do this," and it's off the top of his head. Maybe he remembers what he said last time and says the same thing, and maybe he's got a conversation where he's talking about different numbers and then asked, and then off the top of his head, it's not the same numbers. I think that's probably all that's happening here. There's no deeper intent to give figures all over the place. It's just that they don't have an official guidance, really, except that because Elon says it, and he's the CEO, and he's the very public spokesperson for this company, when he says it, it becomes official guidance.

Sciple: Right, which is what the SEC is bringing their contempt charge. Twitter and things like that have been deemed official ways to release Tesla's information. When those things are unclear, the SEC is going to come knocking. 

Rosevear: Among other things, there may have been places where there was intent to mislead. But there's also just a lack of organization and a lack of structure to the way they present this. I think that was part of what the SEC was going after with the settlement. You need some supervision. You need somebody to oversee this before you just blurt out, "Oh, we're going to build a million cars this year." You've got to have somebody say, "Yeah, but you said 400,000 last week. We have to be consistent." I think that's part of what the SEC was imposing, just recognizing the reality of how Elon operates and saying, "We have to put a little structure around this because these things you are saying offhand have serious consequences."

Sciple: Sure. John, the next story around Tesla that I want to talk about briefly, and you mentioned it earlier, is this idea of Consumer Reports pulling its recommendation for the Model 3 due to reliability issues. Consumer Reports has already pulled recommendations from the Model S, and I believe the Model X never received a recommendation from Consumer Reports. Consumer Reports identified a number of problems with the cars, including issues with body hardware as well as paint and trim. One common issue -- and this is an issue that Consumer Reports even had on its demo vehicle -- is the glass window in the back of the vehicle has a tendency of cracking in a T-shaped pattern.

When you look at the issues that Consumer Reports cited when it comes to reliability with Tesla's vehicles, what questions does that raise for you as an investor? How do you think about that when you look at this company?

Rosevear: It's interesting that I can say the same thing. Again, this is what happens when you ready-fire-aim. This is what happens when you rush a vehicle to market to meet a deadline that you've blurted out on an investor call when the thing was not properly tested the way that a company like BMW or Audi or Ford or GM or any of these other companies we've talked about will test a vehicle before it brings it to market. 

We had a lot of reports of Model 3s, for instance, with frozen door handles. Model 3s that would not charge in extreme cold, suggesting that they hadn't done much winter testing. Whereas, Audi takes 200 prototypes up to the Arctic Circle and bangs on them for three months, or something like that. These other companies -- in fact, Jaguar, before they rolled out the I-PACE, made a point of showing, "We took a whole bunch of these cars to some snowy place and banged on them and had our engineers take notes of what needed to be improved." That was properly understood, I think, as a shot at Tesla. 

That's not necessarily what Consumer Reports is citing here, but it's all of a piece. They didn't fully develop this car before they released it. They improvised things on the production line that maybe don't work out to build vehicles of the quality that they hoped to deliver because they did this fast, they did this by the seat of their pants because they wanted to show people they're innovative, they wanted to show people that they're manufacturing on a different level from ordinary regular automakers, that they can do things faster, that they can execute faster, and so forth. And the result is, the windows will crack because of the way they're installed, or because they cheaped out with a supplier or didn't fully develop the bracket that supports it, or something. Etc, etc, etc. These are the kinds of problems that come up when they didn't fully develop the vehicle and didn't draw on their understanding of what works and what doesn't based on extensive industry experience and so forth. It's the same thing.

Sciple: Right, John. In the past, Tesla had run afoul of Consumer Reports when it came to braking issues with the Model 3. They had been able to correct those with over-the-air software updates to the vehicle. What's important to note here when you're looking at issues with cracking glass and sticking door handles and things like that, those are things you cannot correct via an over-the-air software update. Those are things that are mechanical and take repairs. Another thing to note as well is, when you have these reliability issues, those repair expenses become factored into your insurance expense. When you're going for the mass market with this $35,000 Model 3, insurance expense becomes part of the total cost of ownership of the vehicle. Something to be aware of as we go to this mass market. It's not just a $35,000 vehicle, but it's a $35,000 vehicle with an above-market insurance expense. What do you think about that, John?

Rosevear: I think there's another factor too, here. With your $35,000 BMW 3 series, there is an expectation that when it breaks, you can bring it to the BMW dealer and they will get parts and fix it promptly. We've had report after report after report -- including from one of our own Fool writers, Evan Niu, had this experience himself -- -where people have waited months and months for parts from Tesla, parts that another automaker would have in the shop within a few days. That's another thing with the mass-market experience. Maybe with your Ferrari, you're willing to wait a month for the gasket piece needed to put the whole thing back together. The expectations around a $100,000 car that is a third car for somebody are very different from the expectations around a $35,000 car that somebody needs to get to work every day. It can't be in the shop for six weeks waiting for a part.

Sciple: Right. One thing I want to mention, and Elon Musk mentions this a lot, and Tesla calls it out, that despite these issues, Tesla still holds the top spot at the Consumer Reports customer satisfaction survey. They're really driving significant customer satisfaction. When you look at that, that Consumer Reports is highlighting reliability issues with the vehicle, yet consumer satisfaction is still extremely high, what are your thoughts on that? How should investors think about that? 

Rosevear: That the cars that top the consumer satisfaction survey are not always the cars that are reliable. I mean, the Prius ends up on these lists because the people who buy Prius cars really, really love Prius cars. Do you ever see a Corolla on this kind of list? No, you won't. You're going to see cars that people love that have enthusiast communities. The Jeep Wrangler, the Chevrolet Corvette, things like the Dodge Challenger. These are not necessarily -- they could be, but not necessarily -- paragons of reliability. I mean, I owned a Vet for a while. It was fun, but GM spent less money developing that than they do on a pickup truck, and it showed sometimes. [laughs] I mean, anybody who's ever had a Corvette knows what I'm talking about. It comes with a certain expectation that not everything is going to work 100% of the time. It's that it's going to be a little more of an edgy product and not so much with the Toyota reliability. But these are often the vehicles that get enthusiast followings. Jeeps have a tremendous enthusiast following. The Dodge muscle cars have a tremendous enthusiast following. Corvettes -- and, not always high-performance cars. Like I said, the Prius has a tremendous, devoted enthusiast following, as does Tesla. We all know, spend 15 minutes reading about Tesla on Twitter and you will understand, if you don't already: Tesla people really, really, really, really love their cars. That's great! That's fine. That doesn't mean they're reliable. It doesn't comment on reliability at all. It comments that the car, the brand, is delivering something that these people find deeply satisfying.

Sciple: Right, John. I think if you're going to own a position in this company, you have to be betting on this brand being extremely strong despite the issues that we've cited throughout the past year. That people love this car so much that that they're willing to deal with some of the issues that come with owning the vehicle. Do you want to comment on that, John?

Rosevear: I do. I want to say, the flip side of that is, the Chevy Corvette is not a mass-market offering, despite its high customer satisfaction levels. That isn't what's going to drive that business. The investment case for Tesla is that these become mass-market vehicles. If you have to be a hardcore enthusiast to have one, that's not going to do it. Cars like Camrys end up on these lists, but those are the cars that millions of people depend on to get to work every morning. If that's where Tesla wants to go -- or, if we're going to take an upscale of it, BMW 3 series. Plenty of BMW owners love, love, love their cars and will evangelize them to great length. Plenty of other BMW owners just bought it because it was a nice car, it made sense, they got a good deal that day, they drive it to work every day, and they expect it to work for 120,000 miles or whatever. It's that latter group that makes up most new car sales. It's that latter group that Tesla's has to break into to get anywhere near the sales assumptions that are baked into its stock price. This high customer satisfaction thing says nothing about their chances to do that. In fact, what it tells me is they haven't yet broken beyond the early adopter enthusiast hardcore. Of the people answering Consumer Reports survey who owned a Tesla, some big majority of them are extreme Tesla enthusiasts. You've got to look at the cause and effect here and what that says about where Tesla is in the marketplace right now.

Sciple: Sure. John, the other story I want to talk about is what's going on with full self-driving with Tesla. Just yesterday, Tesla made some relatively significant changes to its website with how it markets its autopilot and full self-driving offering. On the autopilot front, they added some language saying "current autopilot features require active driver supervision and do not make the vehicle autonomous." The more significant changes came in the full self-driving area, where they changed language saying that "all Tesla vehicles have the hardware necessary for full self-driving" to "new Tesla cars have the hardware for full self-driving." By implication, does this suggests that older Tesla vehicles won't be capable of the full self-driving that Musk has been promising going all the way back three, four years? That these early Model 3s and things like that would be able to enjoy full self-driving as Tesla rolled out those capabilities?

Rosevear: I think people who have made some effort to understand what this technology is and isn't, and what is really required to do it, have assumed for some time that these cars that rolled out with all this hardware were going to need some retrofit to actually get past level two or so, what they can do today.

There are big questions. Tesla believes they can do this without LIDAR sensors. They're pretty much alone and the entire industry -- both cutting-edge start-up people and people at automakers -- they're pretty much alone in thinking that. LIDAR units are expensive. Are they going to retrofit them? How is that going to work? And even if they don't, it now seems very likely that the earlier cars that were sold with this promise are going to need an upgrade in computing power. At minimum, that says Tesla has to recall them all and put the bigger computer brain in for this promise to be delivered on. How much is that going to cost? When is that going to happen? Where's the cash going to come from for it? Etc, etc. These issues have been lingering out there a little below the surface for a while, but this brings them back up. 

A little bit separately, what all these changes to the language on the site tell me is that somebody in the legal department finally looked at this. This is the thing that happens when you're drafting the site, when you show it to the lawyers. [laughs] This has been out there for a while, so maybe as part of their corporate governance changes that the board is maybe now belatedly trying to install, counsel took a look at this and said, "Wait, we have to back way off this. This is massive exposure and we can do it right now." Maybe it was the German regulators' actions that brought it to their attention. Something happened. This is not just routine cleaning up the site over the course of business. Something drove this.

Sciple: Two other things to call out as well. They've eliminated language on the site saying "we believe full self-driving will be at least twice as good as a human driver," also backed off claims on the capability and ability to roll out the vehicle, saying, "the future use of these features without supervision is dependent on achieving reliability far in excess of human drivers as demonstrated by billions of miles of experience." Of course, that by implication leads to believe that the sample size of data available to the company needs to be significantly larger than it is today for those capabilities to exist. 

You mentioned interventions by regulators perhaps prompting this. We've seen the NHTSA and the NTSB reopen investigations into Tesla related to some fatal crashes that took place in Florida. Just in the past couple of weeks, we had the second instance of a fatal crash. There had been a previous occurrence of this wreck, and then another one with a separate driver, where the driver of the vehicle was driving down a divided highway where a semi was crossing the two lanes of the divided highway, and the vehicle passed underneath the car, cutting the car in half, killing the driver. This is the second iteration of this sort of accident. We don't know what happened with this current accident. The previous accident, autopilot had been engaged. We do know that for this more recent accident, the car continued driving for an additional third of a mile after the wreck had occurred. 

This also occurs at a time where the NHTSA has received some widespread criticism about the data it used to say that autopilot in the previous crash had actually been reasonably safe. That data had claimed that autopilot reduced crash rates by 40%. However, after a multi-year Freedom of Information Act case, Quality Control Systems Corp got access to the underlying data that the NHTSA had used to reach those conclusions and was able to determine that the data was flawed and could not be relied upon. 

So, as we see regulators again taking a look at Tesla's autopilot, we see repeated fatal crashes with the same characteristics, is there a chance that these changes across Tesla's website are related to this latest action from Highway Safety regulators in the U.S.?

Rosevear: Sure. This is the new lawyer in the legal department seeing this happen and being like, "OK, we have to tighten this up right now." They may not have heard a word yet from the regulators around this, but this is battening down the hatches. This is probably some lawyer having a fit that this language was on the site, and saying, "This should never have gone on the site. We should have done this years ago. What happened here? We have to tighten this way down. You can't be promising this stuff because people are getting killed and hurt."

Sciple: Sure. And then, talking about other promises Tesla has made related to autopilot and self-driving, Elon Musk appeared on a podcast with ARK Invest, which has a major holding in Tesla and has a $4,000 price target on the stock. As part of that interview, Elon said that full self-driving will be feature-complete by the end of 2019, essentially will be safer than a human driver, able to be used without intervention, merely dependent on regulator approval. Given these changes across the website, can we still depend on that guidance Elon gave to ARK Invest and the listeners to that podcast?

Rosevear: Feature-complete is such an interesting phrase, isn't it? You could argue that GM's Cruise automation system is feature-complete, and that all the features are there, it just needs a lot of on-road time to learn and develop and, through machine learning, become more skillful to the point where GM trusts it to be level four and releases it, something they hope will happen this year. We'll see. GM is pointedly not saying that. 

It is possible that what Tesla means is, "We'll be ready to begin that aggressive driverless on-road testing process to accumulate all those miles so that we can release this as level four eventually." I don't know what it means. I don't think anybody knows what it means. It sounds like the kind of thing you say when you want to imply a promise that you're not quite ready to make. [laughs] I don't know! What does Tesla know that everyone else doesn't? I don't know that they know anything that anybody else doesn't. I know that people who know much, much more about the state of this technology than I do think Tesla is somewhat behind, rather than out in front. I think there are partisans who would dispute that. But there's no clear evidence that Tesla is way out in front -- maybe I should say, nobody but its most ardent fans and investors assumes as Tesla is out on the front of self-driving. The pecking order, as widely discussed across the industry, is that Waymo is in first place, GM Cruise is in second place, and then there's a gap to third place. There's something of a gap between Waymo and GM, too. Waymo got started a lot earlier. That's how things are going to unfold.

And yet, you have these people saying that only Tesla has self-driving, etc etc etc. It speaks to the misperceptions underpinning the bull case for this stock. 

Sciple: I think if we're going to place Tesla's autonomous capability along the commonly accepted scale from zero to level five autonomy, Tesla's more in the range of level two or level three autonomy today, vs. --

Rosevear: They're squarely level two. They have not released anything -- the definition of level three is kind of muddy, but I think if you asked Tesla at a moment where their legal department was in the room, they would not claim anything beyond level two. They never have, really, when you nail them down on it.

Sciple: Right. For our listeners, when we think of full self-driving, you hop in the car, you go to sleep in the driver's seat, the car shows up at your work or wherever you're trying to go without you having to intervene, that's a level four autonomous system. That's a big leap. That's what Waymo and GM Cruise are trying to develop. For those capabilities, it's commonly accepted, at least today, that those have to be in a limited, geo-fenced area where you have really robust mapping technology, and you have to use LIDAR to make that possible. None of that is part of Tesla's offering. 

As we see them back off some autonomous claims, something to keep in mind as we look forward at the business, Tesla does cite its autonomous data has been very valuable to them and doing machine learning and building out their capabilities. We'll just have to see. Any final thoughts on that, John?

Rosevear: No. I mean, we just have to see. I tend to think that, because of errors made over the last few years, and course changes and so forth, somewhat related to Elon's style, that Tesla went from a position of being somewhat out in front to being behind. They have some good talent working on this problem. I don't know that they have enough talent. I don't know that they have enough resources. I don't know that the talent has a clear enough picture of what they're realistically charged with doing here. It's a big puzzle. Right now, Tesla is a level two system. Where it goes from here, and when, well, Elon says stuff.

You could really sum up much of what we've said in this very long podcast by "Elon says stuff, and sometimes it's not what happens." [laughs] You know? "Elon makes decisions on the fly, and sometimes he doesn't have all the information." That's Tesla, right there. [laughs] 

Sciple: Yeah. I want to wrap all this together, John. The narrative here, as we said off the top of the show, Tesla has been really successful in building, from a standing start at zero, a really significant global automaker. To do that, you really have to have guts and nerve, and you have to not believe any of the challenges that are in front of you, that you can overcome all those things. That's what Elon is really great at. He's been able to build this automaker to a really important global brand. As you mentioned, changed the narrative around electric vehicles. 

However, there's always a point in time where what got you where you are is not going to get you where you need to go. In investing, to make a lot of money in the stock market, you need to be concentrated; but to stay wealthy, you need to be diversified. To become a very big, important automaker, you have to have that nerve and that I-can-do-anything mentality; but to exist over a long period of time, you have to ride these cycles, you have to be prudent and cautious in how you roll things out. The question that you've got to ask if you're going to invest in this company is, is the way Tesla operates its business going to become more stable over the long term? Or, can we expect this continued volatility and flying by the seat of your pants and those sorts of things? What are your thoughts on that, John? And, just thoughts on Tesla moving forward?

Rosevear: It's Elon. It's all Elon. Elon has made himself Tesla. He has made himself the person who gets to make all the decisions. He has made himself the person without whom important decisions can't be made. He's lost a lot of his executive talent over the last few years. I mean, the departure list is so long that if we read it on the air, that would be a whole nother podcast. [laughs] He's lost a lot of his executive talent because if Elon's running everything, why am I here? Over and over. So, it's on him. As long as Elon is calling the shots, this company is going to be Elon's company. It's going to be quick-to-pivot, it's going to be mercurial, it's going to be maybe making decisions without the benefit of full information and careful contemplation of alternatives. It's going to be making claims that are more aspirational than realistic. It's going to be setting goals that are more to motivate people than to actually be achieved. And so on, and so on. It's all this stuff we've talked about here today. 

I think where we end up is, what happens to Tesla depends on Elon. And Elon isn't going to change into Alan Mulally overnight. He's just not. Or any of the other executives we have admired in the auto industry over the years. He's just not. He is who he is at this point. The guy is almost 50 years old. He's been using this approach for years. It's gotten him an awful long way. At some point, he has to offload responsibility, or have it taken away from him by his board or by regulators, if Tesla is to get anywhere near the promise built into its market value today. 

Sciple: Sure, yeah. John, full disclosure, I own puts on this company. I don't think it's going to take place. I think this company is really starting to show some strain as they've had to change their business model. Baillie Gifford, one of the largest holders of Tesla, has advocated for Elon taking a step back from active management of the company, kind of like how Jeff Bezos does, where he's not on conference calls and things like that. I don't have strong prospects for that taking place. In any event, there is zero chance that Elon will stop being CEO of this company. The really robust compensation package that Tesla's board put in place for Elon last year requires him to receive his compensation to either be Executive Chairman and Chief Product officer or CEO. He cannot be executive chairman for the next three years because of the SEC's settlement that was reached back in late summer. So, Elon is going to be CEO, to stay. As you mentioned, his personality is not going to change. He's almost a 50-year-old man. We'll see what happens. 

Rosevear: We should say, he's not going to leave voluntarily. There are scenarios, including a DNO ban from the SEC, or action of his board of directors, which has so far been essentially his rubber stamp. But, who knows? At some point, they have to be aware of their own responsibilities. If this thing starts to really slip and they're exposed, they may feel the urgent need to take decisive action. We don't know. There's nothing saying that they have to keep him as CEO, even if he really wants to be kept as CEO. There really is uncertainty around this. He's not going to leave willingly, most likely. It's possible he'll say, "Alright, I'm done. I'm going to go play SpaceX." I don't know. But, his unquestioned control of Tesla would seem to be the obstacle to Tesla reaching the heights to which its investors expect it to reach eventually.

Sciple: Sure. John, really thankful having you on! So much news to break down. For our listeners who have made it to the end, thank you for riding with us this hour and a half. So much to talk about with Tesla. Before we go away, John, as we look out the rest of this year, what are you going to be watching most closely out of this company? And what should investors be paying attention to?

Rosevear: What I'm going to be watching most closely is the progress of this factory in Shanghai. What's really going on with the Model Y, what does it look like, what are they expectations around it, where are they going to build it? And, what's the cash level? [laughs] How much money do they really have? Is it enough?

Sciple: We'll find out soon, I'm sure. I follow this company on Twitter every single day. I'm going to keep following it. I'm sure we'll talk about it here soon because this company can't avoid the news. I'll really be looking forward to continue to talk about it with you, John. Thanks for coming on! 

Rosevear: Thanks for having me!

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For John Rosevear, I'm Nick Sciple. Thanks for listening and Fool on!