Tesla Motors Inc. (NASDAQ:TSLA) is having a terrible, horrible, no good, very bad week, and TSLA shareholders may want to thank their lucky stars the market’s bullish tide has allowed Tesla stock to sidestep any setbacks.
On the flipside, sooner or later the dust will settle, and the impact of this week’s ugly news will be measured. That’s when TSLA stock may finally pay the toll.
But isn’t the fatal crash of a Model S — while the vehicle’s autopilot was engaged — old news? It’s not that old, and it still matters now in that it may have long-term implications; autopilot’s design was put into question again this week when another Tesla owner was involved in a non-fatal crash.
That’s not the proverbial straw that broke the camel’s back, though. Neither is the fact that earlier this week, Tesla Motors was forced to lower the price of the Model X after missing its Q2 sales target.
No, the biggest concern TSLA investors may not even know they should have stems from the fact that this week, the company quietly ended its program that guarantees the resale value of the Model S once it’s three years-old.
Key Selling Point Vanishes
The resale value guarantee program was put in place in 2013 (when Tesla was just getting started in earnest) to quell concerns voiced by early customers.
At the time, not only were electric vehicles still relatively unusual, Tesla Motors was a young company. The future wasn’t clear, and $60,000 (and more) was a lot of money to invest in an automobile that may only be a very large and mostly worthless paperweight a few years down the road. The carmaker’s promise that it would buy all those vehicles back at a price around half of its original cost made for a convincing sales pitch.
That guaranteed-value program was available through the first half of this year, pretty much all over the world. From this point forward though — at least in the North America — no such benefit exists. The company will presumably begin phasing out the program in other locales as well.
The official Tesla statement:
“We have discontinued the Resale Value Guarantee program as of July 1 so that we can keep interest rates as low as possible and offer a compelling Lease and Loan program to customers. We will continue to support customers currently financed through the RVG program.”
We’re about to find out how important that guarantee is to the buying-justification process.
Faithful fans and followers — and owners of TSLA stock — will be quick to point out that used 2013 Model S vehicles in reasonably good shape are holding their value, within sight of their new sticker price, which certainly bolsters the case that the guarantee serves no real purpose. That argument will weaken from this point forward though, as more used Tesla vehicles become available, and more new ones are built.
In 2013, Tesla only delivered about 20,000 vehicles, and the resale guarantee will only apply to 4209 vehicles over the course of the coming twelve months. The maximum liability for that tranche of vehicles is less than $200 million, and that assumes those owners will opt to turn their vehicles in or choose not to sell them on their own.
The number will start to get significantly bigger from here though. In 2014, Tesla made 35,000 cars in 2014. The company built 50,000 vehicles in 2015. It’s aiming to produce between 80,000 and 90,000 cars this year.
Sooner later those vehicles will be added to the supply of used cars, and there will be plenty of them. An increasing supply drives prices down, and once the lower-cost, mass-production Model 3 becomes available, resale value will become a big challenge for Tesla just like it is for any other automobile.
Consumers notice these kind of things … even owners of Tesla vehicles who say they mostly want them because they’re good for the planet.
Bottom Line for TSLA
The good news is, this dynamic won’t have a dramatic effect on the company’s results … at least no more than it already has. The second-quarter sales miss is modest evidence that demand isn’t stunningly brisk, but there’s still an appreciable market. Some would-be buyers may simply be holding off on a purchase, waiting to purchase the Model 3 next year.
The bad news is, this dynamic will still have some sort of adverse impact, and it’s going to get worse before it gets better as consumers will increasingly have a choice between new and used Tesla vehicles.
From that perspective, the cancellation of the guaranteed-value program may be a red flag to heed.
Does Tesla know something the rest of the market doesn’t? Remember, health insurers prefer to insure people they know won’t likely need to use it. Tesla may be getting worried that current owners are getting increasingly closer to invoking their value guarantee from the carmaker.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
