To say Tesla Motors Inc (TSLA) investors were sideswiped this week would be a bit of an understatement. They were broadsided … by a much bigger vehicle.
Since Monday’s close, TSLA stock has lost 8% of its value, spurred by a rather negative re-rating of its Model S vehicle in a key consumer-advice publication.
It couldn’t have happened at a worse time, either. TSLA stock — which had lost more than 20% of its value since peaking in July and had fallen under its key 200-day moving average in the process — was finally starting to look like it was on the mend.
When the rug got pulled out from underneath TSLA on Tuesday, shares quickly found their way to new multiweek lows.
The $64,000 question: Is this pullback an opportunity to buy Tesla stock, or is this week’s news a reason to finally pull the plug on this surprisingly unproductive holding?
Consumer Reports Switches Gears on Model S
The prod for the pullback from Tesla shares was, of course, a less-than-compelling review of the 2015 Model S by product-rating publication Consumer Reports.
In contrast to a rather glowing review of the very same Model S published in September (which literally broke a CR record for driving experiences), further polls of 1,400 Model S owners in the meantime have revealed a few too many problems for a vehicle with a six-figure sticker price.
Specifically, Consumer Reports found not-infrequent issues with the drivetrain, power equipment and charging equipment, plus a few too many “squeaks, rattles and leaks” for a vehicle of this ilk that has been touted as top of the line in every way.
The end result: CR was forced to rate the reliability of the Model S as below average.
The news only served to further polarize the two camps interested in the already-polarizing TSLA stock. The “con” camp held up the Consumer Reports pessimistic reliability rating as evidence that Tesla and Elon Musk simply aren’t ready for prime time in the high-end electric vehicle market. The “pro” camp was glad to remind everyone that even with the alarming reliability ratings, most Model S owners conceded they’d buy another Tesla vehicle anyway.
It’s an interesting anecdote to be sure, but weighing the new downside against the remaining upside of TSLA stock, the CR rating may end up being the tiny virus that ends up becoming a major infection after it has had time to incubate.
Reality Check
In a perfect world, consumers would judge the value and quality of every product they buy in a vacuum, with no regard to other similar products or even other products from that manufacturer.
But we don’t live in a perfect world.
The reality is, a dinged reputation can have a lingering effect, particularly when it’s the reputation for a company/product that had been put on a pedestal … like the Tesla Model S, and Tesla itself.
Pacific Crest’s Brad Erickson may have summed it up best:
“This could be a big deal for TSLA. Setting aside our recent negativity on the name for things like near-term execution concerns or the associated fundamental risk, Tesla’s story has always included a few sacred things that have supported the stock: (1) The company has more demand for cars than it can produce for a very long time; and (2) Its cars are awesome. No. 2 has officially been called into question with [yesterday’s] news, which is leading investors to begin discounting No. 1 in the name.
… Impact on demand remains to be seen, but the quality issues increase our caution on the name. With our comments last week regarding initial Model X reservation levels being disappointing, we pointed out our incremental caution on the name. Today’s announcement adds to our caution. We will be monitoring sales center feedback for signs of any slowdown in demand related to the Consumer Reports review…
…We continue to view Q4 skeptically based on execution risk and believe that the “look through bad fundamentals” thesis will not resonate for most investors in front of 2016 catalysts like Model 3 and Gigafactory.”
He’s right about the awesomeness of Tesla vehicles now coming into question, which may have a slow, grinding impact on TSLA stock more than the knee-jerk, one-time response dished out on Tuesday.
And as for the Model X demand Erickson was talking about, Pacific Crest’s polling suggests demand has been minimal. Perhaps worse, half of the Model X electric vehicles that have been reserved were reserved by Model S owners who in the meantime might have been told their vehicle’s problem may not be unique, but an outright design and assembly shortcoming.
Bottom Line for TSLA Stock
In its defense, the Consumer Reports assessment isn’t a company-killer. But it comes at a time when Tesla had little to no room to stumble; patience was running thin for a stock trading at a forward-looking P/E of 95.1 and questionable earnings-growth prospects.
Even before the reliability problems were brought into focus, TSLA shares were back where they were in 2014, as investors were starting to realize a lack of scale — stemming from a lack of demand for six-figure electric vehicles — makes it tough to turn a profit.
A lower-end EV like the Model 3 addresses the issue, but consumers have to be wondering: If Tesla can’t get the little things right when it’s spending a lot of money to make a vehicle, will it be able to get the little things right making an even cheaper electric vehicle that will almost assuredly (out of necessity) get less TLC?
Owning TSLA stock just became tough to justify … and it wasn’t especially easy to do so before Tuesday.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
