Too Many Problems in Front of TSLA Stock
Tesla Motors Inc (NASDAQ:TSLA) appears to have consolidated its gains following its recent drop on the news of the Brexit and a potential SolarCity Corp (NASDAQ:SCTY) merger. Tesla stock collapsed from more than $219.00 to $193.00 in two trading sessions. Indeed, Tesla shareholders—at least the savvier ones who understood the dilution the SCTY-TSLA stock marriage implies—were fuming.
Yet Tesla investors aren’t a monolithic bunch. It seems that some bought Tesla stock because of its Wall Street potential. They may have as much passion for a Tesla car as they do for a barrel of crude oil or a truck full of pork bellies. They may or may not be predictable people, but they are the ones to watch and emulate in a purely investment-based scenario. They are also the ones who were angriest with Tesla CEO Elon Musk after the SolarCity buyback.
Before dwelling on how risky Tesla stock has become because of the SolarCity purchase, it is important to point out that TSLA faces another risk called “Autopilot.”
Times are tough for Tesla right now. The Californian manufacturer has failed to achieve its sales goals in the second quarter and its Autopilot system has come under increased scrutiny.
The National Highway Transport Safety Administration (NHTSA), following the crash of a “Model X” whose Autopilot was engaged, is investigating yet another crash involving similar circumstances. (Source: “NHTSA launches probe into second Tesla Autopilot accident [UPDATE],” Autoblog, July 6, 2016.)
For the time being, the NHTSA has not proven that the use of Autopilot was to blame, as it was in the Florida case. (Source: “Tesla autopilot driver was reportedly watching Harry Potter when he was hit and killed,” News, July 1, 2016.) It should also be stressed that both the driver and a passenger survived this accident. The driver admitted that the Tesla Model X in question had its Autopilot feature engaged. (Source: “Second Tesla Autopilot crash being investigated by U.S. regulator,” The Toronto Star, July 7, 2016.)
At this point, there is not enough information to determine whether the accident was a technical failure or one based on driver negligence. Tesla has stressed that there is nothing to confirm that Autopilot was engaged at the time of the accident. The manufacturer receives notifications and alerts when something is going wrong with a customer’s car. In this episode, Tesla did indeed get a warning that the airbags in the Model X in question deployed as expected during the accident.
In all fairness, the fault here is not necessarily Tesla’s. The semi-autonomous technology behind the driverless application makes for an ideal culprit even though, judging by videos on the Internet, many drivers who own Tesla cars equipped with the Autopilot feature have abused it. Regardless of whose fault it is, Tesla may have to rethink offering this technology. It is too much of a risk for the company if so many people are behaving irresponsibly.
Tesla has always stated that the driver must maintain control of the vehicle at all times while using Autopilot, but the videos show drivers sitting in the back seat or watching movies. (Source: “This is the stupidest misuse of Tesla’s Autopilot yet,” Road Show, November 11, 2015.) Perhaps to reduce the risk of liability and the number of owners pretending to be “Jumbo Jet” captains flying the London to New York route with Autopilot, Tesla may have to change the feature’s name to something less evocative. “Driver Assist,” for example, could be a good name—it’s more boring but safer.
From another perspective, the Autopilot feature has caused other unintended issues of interest for TSLA shareholders. The fatal Florida accident related to Autopilot happened just 11 days before Tesla sold $2.0 billion of shares in the May 18 offering. (Source: “Tesla Said an Autopilot Crash Would Be ‘Material’ Before Elon Musk Said It Wasn’t,” Fortune, July 6, 2016.) The problem is that the offer documents made no mention of the crash.
Tesla advised shareholders that any fatal crash involving the Autopilot feature would be a material event to “our brand, business, prospects, and operating results.” (Source: Ibid.) Yet the company made no mention of the crash in its offering documents?
The news of the accident didn’t come out until last week when it was reported by federal highway authorities, six weeks after the offering. No matter, Tesla shares have gained traction since the incident and investors seem happy to swallow the risk.
Still, some of the more realistic Tesla stock analysts correctly fear that the Tesla takeover of SolarCity has harmed its finances. For Elon Musk, the marriage of the two companies was a matter of course. But no Tesla investor should feel reassured, not two weeks ago and not now, even if TSLA stock has picked up again.
Indeed, since Tesla shares have resumed trading at the pre-SolarCity purchase level of $216.00 to $218.00, neither Tesla Motors nor SolarCity have suddenly started rolling in money. Both burn more money than they absorb.
There is no change there but some Tesla investors are also environmental idealists. They look to Elon Musk as a new-age Noah and his Model S—or better yet the Model X with the pointless, delicate, and problem-prone falcon doors—as the new Ark. (Source: “Tesla’s Model X Has Bigger Problems Than Faulty Falcon Doors,” Wires, April 26, 2016.) They have faith and need to believe that they can keep enjoying the conveniences of modern life and still “save” the world from imminent environmental catastrophe.
They are like the believers who bought Heaven passes (so-called “indulgences”) from the Church to finance the construction of St. Peter’s Basilica in the Vatican so many years ago. This evangelical variety of the investor is prominent in the Tesla stock sphere. No doubt some of them, whom I take this opportunity to salute, will be commenting below. They conveniently forget that Tesla isn’t making enough money.
If there’s anyone who doubts the convenience of money when running a company in the capital-intensive automotive industry, you might want to remember this: Tesla is investing huge sums of money to produce the Model 3, not to mention build the mega-factory to make lithium batteries in Nevada with Panasonic, which is supposed to open in August.
The mean market, which has no ideological subservience to Lord Elon Musk, is less than favorable when Tesla issues shares to generate cash, diluting Tesla stock. Musk will need an extra dose of his legendary persuasion skills to make it easier for his shareholders to swallow the SolarCity pill.
Musk’s plans for Tesla and SolarCity are to create a company of nearly 30,000 employees. All products will be renamed to Tesla, including the electric cars, the batteries, and the solar panels.
Considering the altogether precarious business model and the liability risks—from the over-enthusiastic selling of technologies like Autopilot that still need experimentation before they can be used in real life—Tesla’s stock is hovering in logic- and market-defying mode.
There is excessive emotional enthusiasm in Tesla stock, which could deflate at any time. A few more Autopilot investigations alone could force investors, like lovers finally willing to confront their partner’s betrayal, to take a harder and far more bearish look at TSLA stock.