Tesla (TSLA) stock fell nearly 10% after Consumer Reports gave its Model S a “worse-than-average” rating. This is big news given the reach of Consumer Reports and the fact that Tesla stock is priced on the notion that it can deliver a fleet of must-have electric cars.
That said, even after Tesla stock crash on Tuesday, TSLA is still up 900% over the last five years. While revenue growth has been extraordinary, up from $204 million in 2011 to $3.7 billion over the past four quarters, there’s no doubt that TSLA’s current operating performance does not support its near-$27 billion market capitalization.
However, investors have been willing to overlook TSLA’s present in place of its future. The company produced 12,807 vehicles during its last quarter, good for a 15% sequential increase and a 46% gain year-over-year. Some of the more bullish analysts think that TSLA can deliver 65,000 Model S and Model X vehicles this year.
With that said, so much of Tesla stock value rests on the notion that TSLA can continue to produce must-have vehicles with rave reviews and heavy consumer demand. If any one of these factors fall out of favor, it could have a damning impact on Telsa stock.
That’s why today’s Consumer Reports review is horrible for Tesla stock. Consumer Reports cited poor reliability after surveying more than 1,400 Model S owners. Consumer Reports went on to say that older vehicles are experiencing battery issues along with the need for electric motor replacements, wheras newer vehicles have experienced mechanical issues, like the sunroof not operating properly.
Tesla Stock Depends on Its Brand
While this news may seem insignificant, just remember how CEO Elon Musk has always used the rave reviews for TSLA vehicles to create excitement and brand awareness. In fact, one of the first things noted in Tesla’s Second Quarter Shareholder Letter is that “the Model S has redefined the standards for automotive safety, performance, efficiency, upgradeability and innovation.” The letter then noted that Tesla’s Model S has earned Motor Trend Car of the Year and Best Overall Car by Consumer Reports for two years in a row.
Well, Musk won’t have that title to TSLA’s name anymore, and it will be very interesting to see how the company responds to this new criticism after such high praise. Based on Tesla stock reaction, investors view this news as very serious for the company and its stock.
As previously explained, Tesla stock investors have been more than willing to dismiss the fact that revenue does not support the company’s market capitalization, versus the likes of Ford (F) and General Motors (GM) that trade at less than 0.50 times trailing 12-month sales. (TSLA stock, by comparison, trades at almost 8 times sales.)
Investors have also been willing to discount the fact that revenue growth is decelerating, blaming a slower growing economy and the need for more models rather than considering the possibility that Tesla may not be a mass production company. And lastly, investors have completely ignored the fact that margins have consistently fallen. Not to mention critics like former GM Vice Chairman Bob Lutz who says that electric cars will never be profitable.
The bottom line is that this Consumers Report is negative publicity for a company that’s not used to defending its products. The big question moving forward is how Tesla stock will respond. Will it continue to trend lower behind this report as these noted issues come to light, or will it bounce back and continue to defy gravity?
No one knows for sure, but given its run and the issues that are piling up, I’d put my money on the former.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.