Tesla Motors (TSLA) stock has fallen 30 percent over the past few weeks, with many attributing the decline to an "earnings miss," the belief that Tesla may be at fault for the three Model S fires that have occurred over the past few weeks, and a class action lawsuit that has been filed by Pomerantz Law Firm, in response to all of the above. In my opinion, the decline has had more to do with the sensationalist and incorrect reporting of the "facts," than with the facts.
Investors hitting the "Panic Button" prompted this drop
Although the current consensus is that the first two Model S fires were not the result of a "design flaw," investors were not convinced until significant clarity was given about the circumstances surrounding the incidents. Investors, initially hit the "panic sell" button, resulting in Tesla's stock falling 10 percent on October 7th, and 5 percent on October 27th, assuming the Model S might be at fault and Tesla may have to issue a recall. In both of these instances, after a statement was issued by Tesla Motors, the NHTSA, and the driver involved, confirmed the Model S had not malfunctioned, and no investigation was necessary, Tesla's stock quickly recovered all lost ground.
The current decline began when Tesla's stock fell to the prior support level of $153 after investors were disappointed by Tesla quarterly earnings report. I suspect one of the main driving factors for the initial decline was investors interpreting Tesla's comments about production constraints to mean that Tesla doesn't have enough battery cells to increase production.
The following day, it was reported that a Model S had caught on fire, and many news sources began speculating that there might be a design flaw with the Model S battery pack. Within a few hours of the accident, it was reported that the fire had been caused by the Model S running over a "trailer hitch." Most news sources marginalized the significance of running over a trailer hitch, and instead described the incident as though the fire had been caused by the Model S, running over small debris, causing many investors to think there may be a defect with the armored plate that protects the battery on the Model S. This deluge of "bad news" only got worse when the Pomerantz Law Firm, announced it was filing a class action lawsuit against Tesla Motors to investigate these alleged "design flaws."
On November 7th, Dougherty & Co released a comment to investors from Tesla, clarifying the statement Tesla had made about "production constraints" during the conference call, emphasizing that the constraints are the result of the current factory optimization, and not a limited availability of battery cells.
"Tesla is production constrained at present because the factory is still ramping. Tesla is not cell constrained right now and won't be for another three to four years. Tesla has ample battery supply available to double and even triple current production. That was unclear on the call and we did not make it clear in our conversations with investors this week."
There was a slight uptick in Tesla's stock after this note was issued, but the decline continued anyway. I suspect this was due to investors being too pre-occupied with the possibility that the Model S might have a significant defect. The possibility that a significant defect with the Model S might exist would be very bad for Tesla Motors and Tesla investors and would likely take precedence over any other Tesla news, since a forced recall/redesign could force Tesla into bankruptcy.
A triler hitch is not trivial debris
On Saturday, the driver of the Model S involved in the third fire, published an account of the accident, explaining the details of what happened, and why the Model S was not responsible for the accident.
"There was a rusty three-pronged trailer hitch that was sticking up with the ball up in the air. The truck in front of me cleared the object. I did not have enough time to swerve to avoid the hitch, and it went below my car. Had I not been in a Tesla, that object could have punched through the floor and caused me serious harm. From the time of impact of the object until the time the car caught fire was about five minutes. During this time, the car warned me that it was damaged and instructed me to pull over. I never felt as though I was in any imminent danger. This experience does not in any way make me think that the Tesla Model S is an unsafe car. I would buy another one in a heartbeat." (Tesla Motors Blog)
Running over a trailer hitch is not the same as running over trivial debris. Any low to the ground vehicle that ran over a trailer hitch under similar circumstances would probably have been totaled, and the passengers would have probably been either seriously injured, or possibly killed. Rather than hitting the "panic button" over this incident, investors should view this incident as an example of why the Model S is the safest car on the road.
One Model S owner, KmanAuto, was so outraged by the incomplete reporting on this incident that he went to Youtube, and made a video explaining why any news source marginalizing what it means to run over a trailer hitch, and calling for a recall of the Model S because of this incident is either being disingenuous, or is ignoring the facts.
The Tesla kept everybody safe, and did everything it was designed to do. If you run over a trailer hitch in a Ferrari - guess what? Just the damage caused by that, even if the Ferrari was still not totaled, would still cost you more than the whole Tesla would cost you. Plus, would you have survived on a Ferrari if the fuel tank was punctured and burst into Flames? I don't know. I doubt it. But the keyword is it kept all the passengers safe, and did not touch the passenger compartment. I have no problems putting my kids, my family in a Tesla vehicle. I'm not just a Tesla fan boy. Tesla changed my mind on how cars should be for everybody.(KmanAuto)
In an article I published in April of this year, Tesla Motors Amazing Future Earnings Potential, I correctly predicted that Tesla could hit $144 in 2013, and stated why I think Tesla could be worth $300-500 if investors are willing to look ahead to 2016 and beyond for their valuation. In my opinion, Tesla is not a bubble. As I mentioned in my article, Will Tesla Motors Need a Second Factory?, if Tesla can command two percent of global auto sales in the future, with an average sales price of $40,000, and achieve the gross margins of 25 percent predicted by Elon Musk, Tesla will earn $18 billion in profit annually, and could be worth significantly more than $500. These short-term "dramatic declines" are the result of a short term bi-polar stock cycle, where investors are trying to quickly decide if Tesla is doomed or will be very successful, and many are selling first and asking questions later. I am confident that barring a situation where the NHTSA determined that Tesla needs to recall the Model S due to a "design flaw," Tesla will recover from the current decline, and achieve a new 52 week high by the end of the year. As of this moment, there is no evidence that suggests a recall should happen, or is going to happen. The 30 percent drop has been the result of "panic selling" and I am confident that once investors calm down, and realize that nothing has changed about Tesla Motors in the past few weeks, the stock will recover.