Let me be clear from the beginning. I am not an expert to comment on the causes of the recent incident that involved a Tesla S model catching fire. I do also understand that car fires can happen, under certain circumstances, in any car model. The trouble is, however, that the incident comes at a time that everything seems to go really well for Tesla Motors (NASDAQ:TSLA). Last quarter, its sales rose by 678 percent, its Model S topped Consumer Reports, its stock rose by leaps and bounds. Will the incident have a material impact on the company's sales?
We cannot say. What we can say, however, is that the incident may take away the aura model S has been enjoying, and put on hold the buzz the car and the company enjoys. This setback, in turn, can delay the time it will take for Tesla to drive over the "tipping point," the moment its products reach a critical mass of consumers, as described in the marketing literature by the Rogers Curve. Everett Rogers argues that the spread of new products is a multi-stage process that advances in five stages: Awareness, interest, evaluation, trial, and adoption. In the beginning, product awareness is slow as innovators, a small consumer group, adopt the product. Then, the rate of diffusion picks up as consumers in contact with this those consumers adopt, and so on and so forth, until the innovation possibly spreads throughout the network, also reaching the more conservative consumers (or 'followers"). That is the point Coburn calls "the point of idiocy," where peer pressure has a catalytic effect on individual consumer decision-making, far stronger than conventional advertising.
Eventually, the diffusion reaches the early and the late majority, creating a cascade, galloping sales growth, which is associated with the commercial success of the new product. This means that products that eventually cross the tipping point follow the S-shaped or sigmoid curve, as observed in the diffusion of new durable products, whereby demand begins with a small group of consumers understanding the merits of adoption, and spreads to larger and larger groups until it reaches cascade.
For Tesla's products to reach cascade takes three things. First, the price of its S model must fall well below the $90,000-mark to comparable levels with other luxury cars like BMW, Audi, Lexus, and so on, as was the case with Ford's T-model at the turn of the 20th century; early and late majority is sensitive to product pricing. Second, the battery life must be extended so it can appeal to a larger number of consumers. Third, the company must set up dealerships around the country to address service issues; that's mandatory in some states.
What should investors do in the meantime? Buy the stock or look for a better value in established companies like Ford, which has been turning the corner lately?
It depends on the investment horizon and style of each individual investor. Short-term oriented investors may want to stay away from the stock until things clear up and valuations are more reasonable. Long-term value-oriented investors are better off with Ford's stock.
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Disclosure: I am short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Long F