Seeking Alpha
Long/short equity, value, REITs, macro
Profile| Send Message|
( followers)  

Tesla Motors (NASDAQ:TSLA) has gone up from $35.00 at the open on January 2, 2013 to a recent high of $194.50 intraday on September 30, 2013. That is a 5.56-fold increase in price in just nine months. In October 2013 the stock has fallen dramatically in a few days to close at $173.31 on October 3, 2013 (-10.89% from its recent high). The move downward seems to have been triggered first by R.W. Baird analyst Ben Kallo's downgrade of TSLA from outperform to neutral on valuation. Then the move downward got fuel from a video of a Tesla Motors Model S burning after hitting a large piece of metal in the street (see picture below).

According to TSLA "the fire was caused by the direct impact of a large metallic object to one of the 16 modules within the Model S battery pack." TSLA says each of the modules is isolated by fire barriers by design; and that is why the fire was contained. However, this fire did not look very contained to me. Further it reignited itself after it was put out the first time. I don't know that this would stop me from buying a TSLA Model S, but it would certainly give me pause. I have heard too many other stories about cars and trucks that had problems with fire in crashes. This crash punctured only one battery module. There is no saying that more than one battery module will not be punctured in a future accident.

This incident comes after the Chevy Volt was investigated for fire problems. It had had no real world fires; and it was cleared by the national Highway Traffic Safety Administration, which concluded the car did not pose any unusual risk of fire. By itself the lone TSLA Model S fire to date should not pose a huge problem for TSLA. However, after the Volt probe, which had not had any real world fire, car buyers will be that much more suspect of the TSLA Model S's safety.

There have been autos in the past that have been represented severe fire danger to their drivers. In fact just this year, Chrysler was asked to issue a recall on more than 2.7 million Jeeps after an investigation showed that rear end crashes led to at least 51 fiery deaths. Chrysler refused to issue the recall; but I have no doubt this is an ongoing issue. Plus it is sure to have discouraged many buyers.

There have been many more examples of fire prone autos in the past. For instance, the Ford (NYSE:F) Pinto had a gas tank design problem that led to many rear end collision fires. If ruptured battery modules are determined to lead to unusual fire danger, many potential buyers will be discouraged from purchasing them. Currently there are not that many Tesla Model S cars on the road. As the number grows, we will no doubt see more fires. The number of those fires may determine the true future of the Tesla Model S. If the number of fires is relatively large, it may determine the future of Tesla Motors itself.

In the shorter term, even this one incident, will have a negative effect on Tesla Motors. Conservative buyers may choose to stick to cars with longer track records for safety. As with most everything else about Tesla Motors, this story was sensationalized. The video got a huge number of viewings on It will have a negative effect, no matter what the future record of the car is.

Consider that Tesla Motors already issued a recall on 1228 Model S's in June 2013, after it had sold only a total of 11,000 through May 2013. Keep in mind that the federal government suggested Chrysler issue a recall on 2.7 million Jeeps after only 51 instances of fiery deaths were determined to be a fault of the Jeeps. Tesla issued its first recall of the Model S in June 2013. After 1228 incidents of faulty manufacture in just 11,000 Model S cars made through May 2013, Tesla is not in a position to brag about its manufacturing prowess.

The fire case is more serious than the June recall case. However, this too is a case in which TSLA cannot brag about its record. One analyst estimated there were about 17,000 Model S's on the road in September. One incident in 17,000 is still a higher incident level than 2 incidents per 100,000 for Jeeps, although there was no death reported in the Tesla case. A comparable safety record has yet to be determined; but TSLA's armor of perfection has been pierced.

Does this mean Tesla will miss earnings for Q3 2013? I doubt it. Most are expecting a big beat. In fact the Tesla Model S at 616 sales in Norway in September 2013 was Norway's best selling EV car; and it was the best selling single model in Norway overall in September. Of course, it is the only model Tesla was selling in Norway; and the September sales were before the fire incident.

The fire incident tends to bring the Tesla Model S back into the realm of the other auto manufacturers. In this realm the stock is outrageously overpriced. The company is not even profitable yet on a GAAP basis; and it is unclear how profitable it will be in the future with a huge amount of competition coming soon. Comparing Price/Sales and Price/Book ratios to a premium auto manufacturer like BMW, TSLA is trading at a premium of roughly 20x in each case. This is an insane valuation premium. It is obviously HYPE dependent; and the recent fire, especially when combined with the June recall of Model S's by Tesla, puts a huge dent in that HYPE for any rational person.

Further a loaded Model S costs about $106,000. The Model X crossover, which is expected to be ready at the end of 2014, will be similarly expensive. It will also have a limited audience. The Tesla Gen III, a 200 mile range EV with a $35,000 price tag, is supposed to be ready in 3-4 years (Elon Musk June 5, 2013). Meanwhile Toyota Motors (NYSE:TM) says it is close to finishing a solid-state battery with 600 miles or more of range on a single charge in a compact EV. This may mean a car with this range may be available before the Tesla Gen III. The BMW i3 EV car will be available in the US in early 2014 at a starting price of $41,350. This has a 118-124 mile range; but that can be roughly doubled with a small gas powered generator, which will work to charge the BMW i3's battery. In other words, you can get a "known to be reliable" BMW for about half the price of a Model S. This car may address a much bigger market; but it is sure to take some of Tesla's Model S business too. Later in 2014, the BMW i8 will be available. This is a plug-in hybrid, but it has tremendous performance statistics and a 94 mpg rating. Some comment that this will only go 22 miles in EV only mode. Still it is a green car for around town; and it has a 310 mile range for one charge plus one tank of gas. Since it is a hybrid, it can keep going with a simple refill of the gas tank. For those who take only occasional trips, this may be an ideal car.

BMW is not the only competitor. General Motors (NYSE:GM) cut the price for its 2014 Volt to $34,995. An electric version of the Chevy Spark subcompact goes for $27,495. Chevy is offering discounted leases on both vehicles. Additionally Chevy is working on a 200+ mile range EV. This could well be available before TSLA's 2017-2018 date for its Gen III; and Chevy's offering could be cheaper. Daimler (OTCPK:DDAIF) announced a steeply discounted monthly lease price of $139 on its 2013 Smart Fortwo Electric Drive. The 2013 Nissan (OTCPK:NSANY) Leaf sells for $29.650, after a $6000 price cut. The Ford 2014 Focus Electric will sell for $35,995 -- a 10% price reduction from 2013. Honda (NYSE:HMC) slashed the lease price of its Fit EV by one third to $259 per month. Volkswagen (OTCQX:VLKAY) has recently made claims that it would be the leader in EV's by 2018. It sounds like it intends to compete with Tesla's Gen III. One can easily guess when Volkswagen thinks it should be able to deliver a cheaper (and perhaps better) EV than the Tesla Gen III.

I am sure I have left out many competitors. However, the point is that TSLA is facing extremely stiff competition from some very seasoned automakers. The idea that it deserves to trade at a premium of 20x to BMW is insane. It trades at even greater premiums to some of the other automakers. Even TSLA's CEO Elon Musk has said he believes TSLA's stock is overpriced, "The valuation we have right now is more than we have any right to deserve."

TSLA's stock is priced for perfection. To me it seems it is priced to ignore all of the other EV competition. That competition is sure to prove itself non-negligible. TSLA may have a head start, but it does not have the resources of the huge automakers. They are more than capable of catching up; and Tesla is more than capable of falling off its extremely high pedestal. The fire mentioned above is just further evidence that TSLA's position is far from secure.

There are many further areas in which Tesla Motors may falter. Some of these are listed in the following articles:

There are many other similar articles. Many of the major brokerages have price targets for TSLA of under $100. An NYU Stern School of Business professor, Aswath Damodaran, who specializes in stock valuation, has a has a $67.12 per share target. TSLA stock even after its recent fall presents more risk than possible reward. The fire is just one instance of clay feet showing. There will be more such instances. TSLA makes a good car, but it will still have problems just as other manufacturers' cars do. These will likely be normal for an automaker; but the stock is not priced for "normal performance". Plus the Gen III model that Tesla has been touting as its car of the future (and the mainstay of the company) will likely have significant competition. TSLA may still have a premium reputation; but it will not be a reputation that will give it a 20-fold premium valuation to BMW. TSLA is a sell, even after the recent fall.

The two year chart of TSLA provides some technical direction for this trade.

(Click to enlarge)

The slow stochastic sub chart is near overbought levels. The main chart shows that TSLA's stock price is more than double its 200-day SMA. The most likely technical stock price behavior for this kind of scenario is a large retracement. When some of the finest analysts in the business believe TSLA should be valued below $100, the odds of it falling to that level or below are high. Some hedge fund pumpers, etc. are still pumping TSLA. They love to push their "momentum" stocks as high as they can. However, after the recent fire incident, the TSLA "HYPE based" premium is looking absurd, even to the most loyal Tesla followers. A self re-igniting fire is very discouraging.

When such a fire incident comes on the heels of the Boeing (NYSE:BA) battery fire fiasco and the Chevy Volt investigation, it is highly believable that TSLA is having the same problems as everyone else. This makes its roughly 20x premium to BMW look insane. TSLA is a sell both technically and fundamentally. Not surprisingly, it has a CAPS rating of one star (a strong sell). If you love the stock, it might still be smart to take profits now. You can always buy it back later. With the coming competition, you are almost sure to get the opportunity to buy it at a much cheaper price. In addition, the overall market is trending downward at the moment. This should provide a tailwind to a downtrend in TSLA. TSLA is a sell.

Source: Did Tesla Motors Reputation For Perfection Just Go Up In Smoke?