Elon Musk certainly relishes seemingly impossible challenges. He transformed the longstanding payments industry with PayPal Holdings Inc (PYPL) and has disrupted space travel with SpaceX. And as anyone reading this is aware, he turned Tesla Motors Inc (TSLA) into the name in electric vehicles.
The last of that, though, has been giving Musk fits for the past two weeks.
Tesla stock is off about 5% in the past couple weeks as shares cool down from Model 3 hype. The company announced in early April that it missed its first-quarter deliveries target thanks to issues with the Model X SUV.
A week later, Tesla recalled some 2,700 Model X units over issues with the third-row seat that could result in injury in the event of a collision.
And now, that SUV is proving problematic again, with Consumer Reports publishing an article that highlights reliability problems with the Model X, and reiterating its advice that people not buy any car until after its first year of production.
There is chatter about how the TSLA “falcon wing” doors sometimes bump into nearby objects or that the doors do not properly close. Then there are the curved windshields, which can create a “double vision” effect with headlights and streetlamps. Even the Autopilot feature looks a bit off, as it may even miss certain road shoulders.
The overall impact of all this is far from clear, though Tesla insists that the problems are not “widespread.” If anything, the evidence is mostly anecdotal; besides, the Model X only launched in September, so total volumes on the vehicle are fairly low, anyway.
But if there’s any comfort to be had, it’s this — despite the bad headline news, Tesla stock is actually up 2% in Wednesday’s trading.
Is that an all-clear signal for TSLA investors?
The Key to Tesla Stock
Tesla has been a luxury niche operator since its inception, but that will change soon with the launch of the Model 3 — which is focused on the mainstream market — in late 2017.
The demand has been robust, with roughly 400,000 preorders made (all of which require a $1,000 deposit, so this is hardly just a no-stakes survey of interest).
However, the problems with the Model X might weigh on Tesla in the short-term. This brings into question how reliably Tesla can mass-produce a car. Sure, the Model 3 won’t have some of the glitzier features such as the falcon wing doors, but it’s an EV, so the manufacturing will necessarily be more sophisticated than your already error-prone process for normal vehicles.
TSLA will also have to ramp up the hiring of talent, such as engineers, software developers, manufacturing pros — and yes, quality assurance pros. But this field is suddenly in very high demand, not just from traditional players such as General Motors Company (GM) and Ford Motor Company (F), but now non-traditional potential entrants such as Alphabet Inc (GOOGL, GOOG) and even Apple Inc. (AAPL).
To achieve its dreams, Tesla will need to raise much more capital. According to a report from Barclays, the amount could come to whopping $11 billion over the next five years. This would be about a third of the current market cap.
And all this is occurring amid a nearly 75% run since February’s trough.
Tesla is fine for the long run, but given the negative buzz from the Model X and the challenges of gearing up for the Model 3 launch, it could be a good idea to take some profits for now and look for a better price to buy back in.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
