Is Tesla Stock Too Expensive Given the Risks?
Tesla Motors Inc (NASDAQ:TSLA) opened with a decline of nearly two percent after American authorities opened an investigation into the incident with the autonomous driving car fatality. Tesla stock managed to bounce back by midday, trading just 0.19% lower.
TSLA stock is what philosophers might call a “conundrum.” Others may simply call it “weird.” Either way, Tesla must make more cars to back up its current outrageously high $30.0-billion market cap.
Tesla stock’s price is curious, to put it mildly, considering that Ford Motor Company (NYSE:F), General Motors Corp. (NYSE:GM), and Fiat Chrysler Automobiles NV (NYSE:FCAU) produce millions of vehicles compared to Tesla’s thousands. Yet all of their respective valuations are similar to, if not lower than, Tesla’s valuation.
While logical arguments are waning, the Tesla investor is much like a Dallas Cowboys fan: always ready to cheer, praise, and brag but rarely rewarded for the enthusiasm. That oddity aside, the stock market behaves in ways that humans fail to understand and Tesla stock is one of its mysteries. It dropped as Musk suddenly decided it would be a good idea to dilute Tesla’s shares in order to buy out SolarCity Corp (NASDAQ:SCTY), another company that’s not exactly in the profit-generating kind of business these days. To be blunt, Musk has proposed joining two money-losing companies.
The stock plunged correctly on the news, but somehow, it has bounced back to the $200.00-per-share price level again. This is even happening after news from the National Highway Traffic Safety Administration (NHTSA) that Tesla’s “Autopilot” system was involved in a fatal accident.
Indeed, Tesla is at the heart of the investigation of the first fatal accident involving a car driven by semi-autonomous driving software. A Tesla “Model S” crashed into a truck, killing its owner, 40-year-old Joshua Brown of Florida, who was a retired Navy Seal and enthusiastic Tesla owner.
The company explained that his Model S, using Autopilot, ended up under a tractor-trailer because neither the Autopilot, nor the driver noticed the white side of the truck against the bright spring sky. Thus, the Autopilot did not activate the brakes. As for the driver, according to reports, he was watching Harry Potter. (Source: “Tesla autopilot driver was reportedly watching Harry Potter when he was hit and killed,” News, July 1, 2016.)
Tesla itself announced the accident, offering its sympathy to the driver’s family. But the accident is sure to fuel the debate over the viability of driverless technology and its use on roads today. Some car manufacturers, including safety technology pioneering company Volvo, have not shown much enthusiasm for driverless systems. They have deemed the use of the technology to be irresponsible at this time.
Tesla was keen to explain that this was the first fatality in more than 130 million miles of Autopilot use, but it could be a problem for Tesla stock. Elon Musk is right to point out that in the U.S., there is a fatal accident every 94 million miles and around the world about every 60 million miles. Still, the technology is new and more such accidents could happen, bringing Autopilot’s performance closer to the average. As Tesla says, the Autopilot software is a beta technology and is still being tested and improved. Perhaps to protect investors from potentially huge lawsuits, only Tesla engineers should be using it.
In Tesla’s defense, the company has insisted that the semi-autonomous software requires the driver to keep his/her hands on the wheel at all times, overseeing control of the vehicle during use. Autopilot is supposed to reduce the workload on the driver in order to improve safety compared to purely human driving. It is not a perfect system and still requires the driver to remain alert, said Tesla. (Source: Ibid.)
Many automakers are testing similar software to Tesla’s Autopilot. Mercedes-Benz and BMW have long had driverless technology, and the former company is even testing it on trucks, but neither company has made the full driverless function available to the average customer. Tesla has been the subject of much criticism for introducing the Autopilot function too soon. Volvo, a company noted for its safety focus, has been especially critical, suggesting Musk is a little over-confident in his Autopilot. (Source: “Volvo’s Dr. Peter Martens believes that Tesla CEO Elon Musk lies when he says that the Autopilot drives better than human beings,” The Country Caller, June 12, 2016.)
Musk has a tendency to over-promise. Perhaps it’s not a fault that he has enthusiasm, but sometimes he might be better off containing it. Indeed, investors should be worried by some recent suggestions that the Tesla Model S can float. (Source: “Elon Musk Claims Tesla Model S Is Totally Amphibious, Sort Of,” Road and Track, June 20, 2016.) The car was not designed to float like a boat and the CEO of the company should not encourage—even if only by suggestion—owners to try it out.
The bottom line is that Tesla stock could fall dramatically and suddenly. The company is taking big technological gambles while the CEO is playing with Tesla revenue, diverting it to other companies, seemingly oblivious of the consequences to shareholders. Even at its current valuation, Tesla stock is too expensive.