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In the after-hours of Tuesday, Elon Musk of Tesla (NASDAQ:TSLA) was the guest of CNBC where he talked about a variety of topics. Perhaps the most important topic covered by Mr. Musk was the recent fires we've seen in Tesla vehicles. In fact, this was the first question Elon Musk was asked by the interviewer. To answer this question, Elon Musk said that on average there was a car fire for every 1,300 gasoline cars. He also said that there were 3 fires for almost 25,000 Tesla cars in traffic, therefore a Tesla car was 5 times less likely to catch fire than a gasoline car. In this article, I will list the four reasons why it doesn't make sense to compare average gas car to a Model S in order to have an apples-to-apples comparison.

Reason 1: Average Model S is much younger than average gasoline car

It hasn't been that long since the first Model S hit the market. In fact, most of the ramping up for Model S happened in the last 2 quarters and the average age of a Model S is less than 9 months old. On the other hand, the average gasoline car in the US is 11 years old. When a car gets so old, its parts start weakening and it becomes more likely to take damage from accidents or road debris. Steel is one of the strongest elements in nature but even steel is susceptible to metal fatigue, which is described as "progressive and localized structural damage that occurs when a material is subjected to cyclic loadings."

A new car that hits some debris is far more likely to survive the damage than an 11-year-old car which has been subject to plenty of metal fatigue over the years. Even without the metal fatigue, there is the regular wear-and-tear that comes with each car after several years of usage. Comparing a Model S' damage to a regular car is like comparing cancer rates of 20-year-olds to 60-year-olds.

Reason 2: Model S is much better sustained than an average car

Model S is an expensive car and it isn't something anyone can afford. Despite saving some money to its users on gas, a new Model S costs 4 times as much as an average new car. Someone who is able to afford a Model S will probably be very wealthy (at least much wealthier than an average American). This is evidenced by the fact that Model S is a top seller in 8 of the richest zip codes in the US. What does this tell us? Well, average Model S owner is far more likely to maintain his car and keep it in a good shape than an average American. If I have an 11 year old car which will cost me a few thousand dollars to replace, I might not be too motivated to spend hundreds of dollars to maintain it nicely, but someone with a 100,000 car will have all the motivation (and resources) to maintain their car in top shape.

Reason 3: Tesla owners are older, more educated

Because Tesla is an expensive car, most Tesla owners are going to be older and more educated than owner of an average car. Statistics show that younger people are far more likely to get in car accidents than older people. In fact, if we look at statistics by miles-driven, teenagers are 4 times more likely to get into traffic accidents and more likely to die from accidents compared to the rest of the population. In fact, 75% of the people who are affected by traffic accidents were between ages 15 and 24. Since most Tesla S owners are going to be older than this age group, they are less likely to get into traffic accidents. This is why it would be a more appropriate statistic to look at car fires by accident than just the overall rate of car fires.

Reason 4: Teslas will be on relatively nicer roads

Considering the fact that most Teslas so far were sold in wealthier states with nicer roads such as California, these cars are less likely to get into accidents that might be caused by a road condition. Those who live in rural areas and poorer states are more likely to hot potholes, bumps or see debris on the road than those that drive in wealthier roads of the country. If you are less likely to find debris or bad road conditions, you are less likely to have accidents. In 2004, 25,000 traffic accidents were due to road debris. Since Tesla owners are less likely to drive on bad roads that are likely to have problems, they may have a lower chance of having accidents and related fires.

How car fires happen?

According to FEMA's statistics, 32% of the car fires happen due to accidents or careless behavior on the road. Of these accidents, only 1.7% actually originated in the fuel tank of the vehicles. Most vehicle fires were originated in the engine (61%) or one of the electrical parts (or cables) of the car. A total of 15% of the fires were originated in the passenger cabin of the car, which means that many of these fires might be caused by behaviors like smoking in the car. Of these accidents, only 27% were ignited by a liquid, which includes gasoline. A total of 60% of the fires were ignited by general materials or other unidentified materials, so the gasoline is not the culprit in most of these accidents. FEMA also believes that a large (but unknown) number of car fires are initiated by the owners of these cars in order for them to collect money from insurance (i.e., insurance scam) and many other car fires involve arson.

How to make Apples to Apples comparison

In order to make a better apples-to-apples comparison, Elon Musk should have compared Model S fires with the ICE car fires that are limited to new cars, driven in wealthier neighborhoods with nicer roads and operated by wealthier and older portion of the population. Maybe a good apples-to-apples comparison would be 2013 Model S versus 2013 BMW M5. That way, we can see how Model S compares to cars that are in its league.

Final Thoughts

Having said that, Model S still seems like one of the safest cars on the road. Out of all the reported accidents involving a Model S, there we have yet to see a fatality. We haven't even seen anyone who was seriously injured. Pretty much every Model S accident resulted in the operator walking away safely, which is very impressive.

There have been many articles talking about Tesla's valuation, so I probably shouldn't bore you with those details; however, despite a sharp correction from its all-time-high price of $196, Tesla is still priced for a lot of future success that may or may not happen. If you are long in Tesla, I don't necessarily suggest selling, but I believe that it's a good idea to hedge your position in one way or another. For example, selling calls or buying puts might be a good way to protect your position in case something goes horribly wrong.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. I am long both TSLA calls and puts.

Source: 4 Reasons I Am Skeptical Of Elon Musk's Calculation