Tesla Motors Inc: This Could Hurt Tesla Stock

Tesla Stock“Autopilot” Puts Tesla Stock at Risk

As if wanting to defy gravity and Isaac Newton himself , Tesla Motors Inc (NASDAQ:TSLA) stock has gained two percent. Once again, Tesla stock’s performance flies in the face of several indicators. It trades at a negative 61.46 price-to-earnings (P/E) ratio in 2016. The P/E forecast for 2018 stands at -137.97.

Meanwhile, Mobileye NV (NYSE:MBLY), which worked closely with Tesla on its famous “Autopilot” program, has accused the Palo Alto-based company of taking excessive risks with this feature. This is relevant, given this technology’s importance to Tesla cars’ consumer appeal.

Tesla stock was trading almost two percent higher despite the muddy finances and the looming menace from its ill-thought-out merger with (or takeover of) SolarCity Corp (NASDAQ:SCTY).

Last July, Mobileye cut the wire with Tesla. This didn’t affect Tesla stock, but there may be fallout from a closer look at the problems that the whole “autonomous” driving affair could create.

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It seems that Mobileye has accused Tesla of adopting driverless technology too audaciously. Thus it terminated its relationship to Tesla. According to Mobileye, quite simply, Tesla was “pushing the envelope in terms of safety” with its Autopilot (that is its actual name) driverless system. (Source: “Mobileye says Tesla was ‘pushing the envelope in terms of safety’,” Reuters, September 14, 2016.)

Mobileye was Willing to Take a Bullet

Interestingly, after a bullish rise from June to July, Mobileye stock actually lost over eight percent since it broke with Tesla. That should raise concerns about the kinds of risks that TSLA stock carries. Mobileye’s concerns should have raised all kinds of red flags. The company merely brought up a serious flaw that, for the good of Tesla and its customers and TSLA stock, should have prompted a major review.

Mobileye Chief Technology Officer Amnon Shashua warned that Tesla’s Autopilot “is not designed to cover all possible crash situations in a safe manner… No matter how you spin it, (Autopilot) is not designed for that. It is a driver assistance system and not a driverless system.” (Source: Ibid.) Meanwhile, Chinese news reports suggest that the first deadly accident involving Tesla’s Autopilot may have occurred in China last January. Until now, it was thought that an accident in Florida involving driver Joshua Brown was the first. (Source: “Another fatal Tesla crash reportedly on Autopilot emerges, Model S hits a streetsweeper truck – caught on dashcam”, Electrek, September 14, 2016.)

Tesla should heed Mobileye’s prudence with technology as revolutionary—and as dangerous—as Autopilot. Instead, Tesla said in a statement that Mobileye could not keep up with the changes introduced by Tesla. (Source: “Mobileye Concerned Over Autonomy Reputation Following Fatal Tesla Crash,” Jalopnik, July 26, 2016.)

Mobileye has shown serious concerns about the reputation of autonomous driving technology. It did so to the point of breaking with Tesla. By doing so, it was aware that MBLY shares would fall on the news, given Tesla’s visibility and trademark association with driverless technology. In the end, Mobileye has shown unusual integrity while Tesla’s attitude risks harming shareholders and damaging an entire industry (driverless systems).

It’s true that after the fatal accident in Florida, Elon Musk repeatedly declared Tesla’s intention to improve Autopilot’s safety and performance. In a sense, he hinted that this would imply limiting its capability. Incremental improvements, already contained in the recent “Autopilot 8.0” release, should help. It will make it harder for drivers to ignore warnings to keep their hands on the steering wheel. Better still, Tesla has also promised to improve the Autopilot’s hardware.

Tesla’s Autopilot Has an Achilles’ Heel

That’s all good but, on close inspection, there are some challenges. Indeed, don’t expect Autopilot to contribute to TSLA stock’s value. Apart from the fact that Mobileye clearly didn’t like what its big-name client was doing with its technology, Tesla’s Autopilot has a technological Achilles’ heel.

Unlike Google (Alphabet Inc (NASDAQ:GOOG)), which has worked on driverless technology extensively, Tesla does not use radars much. It relies on cameras more than radars. Radars are much more precise. Because of that, radars interfere more and force the driver to take over more often. This is because they see or sense everything (including potholes). Cameras do not; that’s why they give the impression of being better.

Thus, camera-biased driverless systems allow a car to self-drive longer and straighter along the road. It’s no surprise that Tesla is moving toward using more radars. (Source: “Tesla Shifting Autopilot from Camera to Radar-Based Sensing,” Fortune, September 11, 2016.) Yet this has its own set of challenges. It will vastly reduce Autopilot’s ability unless Tesla finds a way to manage radar’s sensitivity. This move, in some ways, validates Mobileye’s reasoning for rejecting Tesla’s business.

Recall that Mobileye can boast among its clients 27 automobile manufacturers. They use its collision-detection systems, grabbing a sizable portion of the market. Tesla should take a stricter attitude towards all those who use Autopilot incorrectly. Joshua Brown, who was the driver and victim of the Florida crash, never missed an opportunity to show off his Tesla’s feats on “YouTube.” Tesla shareholders would gain if the company was more forceful in its condemnation of wanton use of its Autopilot system.

Tesla’s Autopilot, after all, while attracting the attention of swooning legions of fans, differs little from similar systems. The problem starts with the name “Autopilot” itself. This is deceiving; it’s not an autopilot. Mercedes-Benz offers a similar system but falls short of calling it anything as pretentious as that.

Meanwhile, Tesla’s statements over the proper use of the system leaves too much open to interpretation. Tesla says Autopilot is safe, yet it tells drivers to remain vigilant and be ready to intervene. So, a little more clarity, more limits, and better hardware would benefit TSLA stock more than haughtiness. Part of the confusion is that the so-called Autopilot—as the owner’s manual of a Tesla “Model S” states for legal reasons—is not in fact an autopilot. Investors should keep track of Tesla’s driverless technology evolution; it is shaping up to be one of the key predictors of the direction TSLA stock takes.