A few days back I noticed a thread on the Tesla Motors Club forum by a user claiming that Tesla (NASDAQ:TSLA) has been systematically throttling the performance of its cars based on the user's driving habits. The thread can be seen here. Normally I would not give it much thought, particularly given the user refuses to provide evidence proving his claim. However there are a few reasons why I now believe this is credible. Firstly the user is a well respected member of the Tesla Owner Community and has been known to reverse engineer the firmware several times before. Secondly and more importantly Tesla seems to have updated their disclaimers adding a line to indicate they have the right to do so after this came to light.
"Performance versions of the Model S and Model X are high-performance vehicles. As with other vehicles, continuous high-performance driving will stress the vehicle's components and may result in premature wear or failure. To help protect the performance and longevity of the powertrain, Performance versions of the Model S and Model X continually monitor the condition of various components and may employ limiting controls to optimize the overall driving and ownership experience."
Finally since this was revealed, several owners have contacted their service reps asking about it and a few people have received confirmation that such a system is in fact active.
The PR Issue
The main problem here is how Tesla seems to be handing the situation. It is a common practice for car manufacturers to void their warranties if a user wants to track/race their car. However these conditions are explicitly stated at the onset. Tesla however has not put such a restriction on its warranty but is instead trying to manage its liability without the customer's explicit consent. A better approach may have been to give the user the option of either keeping the 8 year warranty under these conditions or scrap it and give the user unrestricted performance. Indeed a lot of users willing and able to buy their top performance model may have gone for the second option. The current situation has just resulted in a lot of angry customers.
Impact on Margins
Ok, so let's come to why this is important to an investor. According to its Q3 letter, Tesla achieved gross margin of 27.7% for the quarter. While they have barely made a profit, there is no denying that it is their customers who opt for the highest performance, most expensive cars that are propping up their results. Currently the difference in price between the top Model S P100D model and the next 90D model is $42,500. Previously when the "Ludicrous mode" was sold as an optional extra, it cost users a cool $10,000. This was where Tesla was making its money and given it was the quickest production sedan in the world, it gathered a following among performance enthusiasts. Now if these customers are turned off by the recent events and fewer people opt for the maximum performance version, this can have a significant negative impact on their margins.
Tesla is at a stage where it needs to execute perfectly to have a shot at being successful. It cannot afford missteps like these that risk alienating its most loyal and profitable customers. While Tesla may still be able to do some damage limitation, I am afraid some permanent damage may already be done. I believe this is another downside catalyst in this name.
Disclosure: I am/we are 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.