Tesla: Another Recall Dings Image

| About: Tesla, Inc. (TSLA)
This article is now exclusive for PRO subscribers.

Summary

More than 53,000 vehicles recalled for parking brake.

This is the second recall for some Model X units already.

Will recalls overload service infrastructure?

Yesterday, I detailed three key questions regarding Tesla's (NASDAQ:TSLA) upcoming Model 3. One of the issues I discussed was the company's service infrastructure, which has been lacking so far causing numerous long waits for customers. On Thursday, Tesla announced a recall for a large chunk of its 2016 production, which not only will create more service backlogs but continue to change the image that Tesla is "not just another automaker."

Tesla is voluntarily recalling 53,000 units of its Model S and Model X vehicles manufactured between February 2016 and October 2016. The recall is due to a potential manufacturing issue with a gear in the parking brake that could possibly prevent the brake from releasing. While the company doesn't have any information on accidents or injuries due to this potential problem, it's being proactive in regards to customer safety. Additionally, the company doesn't expect the recall to be material to its financial results since the third party responsible for the part is covering the cost.

Tesla will start notifying customers immediately, but the fix could take up to six months as the part manufacturer needs to ramp production of the part. That will put a load on Tesla's already strained service infrastructure, because the company has not invested enough to date to serve its customers. There are numerous complaints on the Tesla forums about service times being weeks or even months in some cases. While the company is expecting massive capital expenditures ahead of the Model 3 and through its early launch period to help this situation, we'll see if the company gets its service centers to where they need to be.

For some Model X units, mostly the earliest produced ones, this will be the second recall in just over a year. If you remember, it was this month last year when Tesla recalled all X units to date, about 2,700 vehicles, due to an issue with the third-row seat. It's not the first recall for the Model S either, so those arguing that Tesla isn't just "another automaker" are starting to lose their battle. If the stock were to start trading like other automakers, a lot of investors would be in big trouble.

In early Thursday afternoon trading, Tesla shares have lost about $5 on news of the recall, putting a test of $300 in play. While the recall itself is proactive and that's good for the company, it shows that Tesla can have problems just like other vehicles. Fixing the problem shouldn't be material to the company's results, but it could put a further strain on Tesla's already troubled service infrastructure. Hopefully for investors, the company can get problems like these fixed soon and not have them with the Model 3, or things could get very dicey.

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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.