By Scott Tzu
The news cycle is a very important factor for companies like Tesla (NASDAQ:TSLA). One could easily make the argument that Tesla operates on public perception and not on financial results at this point in its history. The company recently announced roughly 373,000 reservations for its Model 3. This was a great headline, so the stock increased, despite the need to raise significant amounts of equity capital directly after the announcement.
The public, and many retail traders, take their cues on Tesla from what's in the headlines. We believe the valuation of the company is determined by how the public perceives the future success of the company, not by discounting the future earnings or cash flow of the company. Since there is no financial backstop (in fact, one could argue that there is just the opposite) a negative news cycle could have a far more of a negative effect on Tesla than it would for other companies.
Over the last couple of days, we have reported twice about the suspension issue that we believed had the potential to turn into a cover-up scandal for Tesla. Tesla issued their response a couple days ago, which we analyzed and questioned in an article that we published on Friday.
Skeptics were asking why Tesla was having customers sign a nondisclosure agreement simply for making out of warranty repairs on certain vehicles. The company assured the public this was normal and it's response was that these "Goodwill Agreements" were standard practice. Tesla made it seem as if there was nothing to be concerned about regarding the suspension in Model S vehicles. However, as we pointed out in our article, Tesla did issue a service bulletin internally making the comment that the suspension could have more play than it should have, thereby admitting at the very least that some issues have been reported and that it's an issue worth watching out for.
Also on Friday it was reported that Tesla had "reached an agreement" to edit its "Goodwill Agreement" with the NHTSA,
Tesla will amend language in its so-called Goodwill Agreement that it asks customers to sign if the Silicon Valley electric car manufacturer pursues repairs that are outside a warranty claim, NHTSA spokesman Bryan Thomas told Reuters Friday. Tesla did not respond a request for further comment late Friday.
The compromise comes one day after NHTSA administrator Mark Rosekind said that it was looking into a report of a faulty Model S suspension reported by an owner who also made reference to a Goodwill Agreement. On Thursday, Rosekind called the nondisclosure agreement "troublesome."
Tesla stock traded lower on Friday due to this story being in the news. Despite the company's response, the public didn't seem reassured and Tesla extended losses from over $235 per share to near $219 a share, where the company finished the week.
We believe that this is because Tesla stock responds to negative press with more of a beta than normal companies. This is a reason we continue to be skeptical on the company as an investment moving forward, aside from additional obvious reasons like the company burning cash.
One of the items we wanted to point out in our article on Friday, but didn't, is that the news cycle could negatively affect the company moving forward from here. It doesn't matter that Musk claims the NHTSA has cleared the company and it doesn't matter that the company has given its side of the story. There are still questions that need answers here, and we believe journalists will flesh them out.
One of our concerns when we wrote our first article, earlier last week, was that the mainstream media was finally going to start picking up on an issue that was well-known in the Tesla on the ground for several years. With the mainstream media picking up this piece of news, we expect that several journalistic outlets will do a in-depth look at the nature of these nondisclosure agreements, and the nature with which Tesla has been issuing them over the course of the last few years.
Questions that still need to be answered:
1. How many of these Goodwill Agreements have been issued and signed by the company in total?
2. Has the company made any out of warranty repairs where they did not ask the patron to sign an NDA?
3. On Twitter, Tesla CEO Elon Musk claimed that numerous suspension issues reported to the NHTSA were "fraudulent". How many issues have been reported in total?
4. Why the need to issue the internal service bulletin if there wasn't an issue worth noting?
We expect these questions to be asked and answered in the media in upcoming days.
As a reminder, this comes just months after Consumer Reports stopped recommending the Model S "after owners of the electric luxury sedan complained of a series of problems including squeaking noises, motors that needed to be changed and issues with the car's automatic door handles."
A great example of the story just starting to hit the news cycle is an article that was published in the New York Times today titled "For Tesla Owner, Losing a Wheel Was Just the First Surprise".
We expect more stories like this to be on their way, and we expect them to continue to ask tough questions.
This brings us to our skeptical investment outlook on the company. We have been Tesla skeptics for some time now, and this new cycle of negative news is only going to hurt the company more moving forward.
As an investment, we do not want to be long Tesla. There are too many things that have to go perfectly right for the company and its execution for the next 5 to 10 years in order for it to deserve the valuation that it has. We think this is too much "assumed perfect runway" for the company and that we are far more likely to see errors and negative headlines than continued perfect execution.
We also would like to make a quick note that continued executive exodus at the company is another reason for us to be cautious. We have written about this at length, and we do not discount what this could mean for the company going forward.
We will give Tesla credit for their execution so far. It has been nearly seamless, and this is what has driven the equity price to where it is and allowed the company to round up numerous financings and continue to fund operations. However, heading into an environment where interest rates are rising and the short-term debt cycle is starting to turn over, we are not sure that Tesla is a great investment at this point.
Disclosure: I/we 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.