Tesla Shares Dive Again Stung by Fatal Crash Credit Downgrade

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That test car being crashed above did not hurt the passive dummy driver but anyone considering buying into Tesla (NASDAQ:TSLA) now could easily get hurt due to a number of obstacles that are mostly too late for Tesla to avoid, autonomously or otherwise.

I might be using a bit of wordplay with autonomous but one of the obstacles that Tesla could still face is the US government's formal investigation into Tesla's autopilot which was in use in a number of crashes when people have been injured and one killed.

I first flagged up the danger of Tesla's share price and market valuation on November 1, 2021, in A Crash Is Becoming Certain. Then the stock price was $1,209. The last price as I write was $860, a decline - crash? - of 28.86%. I included other factors in that article that could hurt the market generally but some, such as China, have yet to crystallise making Tesla a stand-out part of the ripple effect I feared then and still do. But to give Tesla's shocking performance perspective, the S&P 500 is down only 4.3% in that time.

In a more recent article, Tesla's Taper Tantrum, I speculated that the "price may eventually get back to $100 to bring its market cap more in line with other car makers."

I now think that might be overly optimistic given the constant feed of challenges Tesla faces, most of which are self-caused as is the autopilot problem. As the costs for fixing those become apparent, the share price will probably fall significantly.

I shall expand on those later but will first mention a few points about Tesla - the car maker - that most will know about but some might not.

Tesla

Tesla was founded by a visionary named Elon Musk who saw an opportunity in electric cars, EVs, when other car makers - and especially the US and German makers - were mostly focused on traditional internal combustion engines, ICEs.

He gained an almost cult-like following among retail investors and used the resultant share price explosion to raise over $13 billion in four stock offerings. Car making is a capital-intensive industry and such low capital costs give it an advantage to get off the ground and into the big league. Today, Tesla is the world's 14th largest car maker according to Zippia.

It also had good profit margins. Being a newcomer to car making, Tesla did not have legacy car maker problems such as restrictive unions and large company bureaucracies to add cost plus EVs require many less components than ICEs. That makes Tesla's profit margins better - gross margins were 23% in fiscal 2020 compared with Ford's (F) 10%. That gap is closing. Tesla's superior margins over other carmakers are used by many believers to justify its high valuation but, while they are good compared with many, they are not massively better than the world's largest carmaker Toyota (TM). The latest figures show this:

Tesla's GM: 25%. Net: 10.5%. Ops: 12%

Toyota's GM: 24%. Net: 8%. Ops: 7.5%

That GM gap will close when Toyota (and others) build more EVs because of the hugely lower amount of materials needed to build EV motors than ICEs.

Financial results look good. Tesla reported another record quarter in Q4, delivering $2.54 in non-GAAP EPS, beating consensus estimates by 16 cents. Revenues came in at $17.72 billion, bettering consensus estimates by $1.08 billion and registering a 65% YoY increase in sales with car gross margin at 30.6% in the quarter. Free cash flow increased to $2.78 billion from $1.33 billion in the prior quarter.

For those interested, this is the detailed financial report.

More information overall on Tesla can be found on its website

I want to expand on things that are not on the website and pose a big risk to Tesla's future stock market valuation. Perhaps the biggest one is costs associated with...

Quality, Safety & Service

This is a self-caused major problem that only recently has started to show as more and more Teslas hit the road.

Safety first. This was the situation at the time the above-mentioned investigation started in August 2021. A quote from that link:

The investigation covers 765,000 vehicles, almost everything that Tesla has sold in the U.S. since the start of the 2014 model year. Of the crashes identified by the National Highway Traffic Safety Administration as part of the probe, 17 people were injured and one was killed."

NHTSA says it has identified 11 crashes since 2018 in which Teslas on Autopilot or Traffic Aware Cruise Control have hit vehicles at scenes where first responders have used flashing lights, flares, an illuminated arrow board or cones warning of hazards.

If Tesla is found to be, in any way, responsible for those accidents, the resulting legal claims from the deceased person's bereaved and the injured could result in tens of millions of dollars in compensation claims in addition to the cost for any fixes that might be needed to those cars.

The recent announcement of a recall of 475,000 cars built between 2014 and 2021 is on other safety issues. That is around 25% of all cars so far delivered and must bring with it a huge, direct financial hit.

Assuming $100 cost per car, that means a hit of $47.5 million. That is a pure cash cost and possible profit hit. Tesla was loss-making until it broke into profits in the latter part of 2020 and to date has made total profits on less than 10% of that amount!

Also, if an automaker is found to have hidden a safety defect, NHTSA can fine the company more than $22,000 for each violation and up to $111 million total for a series of related violations.

Added to that is this SA News Editor report on Feb 10, 2022, Tesla sees fourth recall action in two weeks. That is another safety recall!

Federal law requires all safety recall repairs to be provided free of charge on cars that are up to 15 years old. That's counted from the time the car was sold to the first owner, rather than based on model year or the date of manufacture.

In Germany, periodic technical inspection by (Hauptuntersuchung/TÜV) is required. By law, all vehicles must be routinely tested to ensure they meet German safety standards. After a car has been in use for three years, it must be tested every 24 months. Many Tesla cars have fallen into this for the first time and this report by Car-Recalls.eu for 2021, published on Jan 29, 2022, ranked Tesla's Model S as 126th worst model out 128 models tested! This is an excerpt from that report: "the headlight issue plays a role, but also wishbones faults, resulting in a huge failure rate of 10.7 per cent! This means that approximately one in ten Teslas fails their first inspection."

Those cars would mostly still be under Tesla's 4-year warranty, so Tesla must pay. Plus it causes the owners much inconvenience while their cars are off the road. Germany is one of the world's biggest car markets.

This report by autoevolution.com says, among other things: "The TÜV report reinforces that Tesla has to urgently take care of quality control and vehicle testing. In a few years, the Model 3 and Model Y will start needing general inspections and the results could hurt Tesla's reputation in Germany and Europe as a whole. While there's still time to avoid that, the EV maker has not given any signs so far that it is even slightly concerned about this."

Germany is one of the world's biggest car markets!

Quality. Safety problems might be solely design issues or resulting from poor quality but, whether a safety issue or not, Tesla's quality is generally poor. According to Statista, Tesla's total car deliveries from the beginning of 2016 to the end of 2021 were 2,226 million. According to J.D. Power, Tesla is ranked 30 out of 33 for dependability.

Service. Tesla is unusual in that it owns its own sales and service centres. That could be a positive but instead a recent CNBC report said "Tesla has struggled to keep up with service as sales have soared. Customers have complained about long wait times, a lack of loaner cars, and having to travel hours to get to the nearest service centre".

Costs

All costs for those many problems must be paid for under its warranty that extends for 4 years or 50,000 miles/80,000kms. Tesla makes a warranty allowance of $1,500 per car in the P&L at the time of recording the sale of a new car. According to warrantyweek.com, "the world's automakers accrued an average of $676 per vehicle sold last year (2020), up significantly from $536 in 2019." Since Tesla is proving to be worse than average, its costs are likely to be higher than provided for in its warranty provision.

Tesla sold nearly 1 million cars last year and there are probably around 1.5 million still covered by warranty. Any costs above the provision will hit future profit figures but worse is the cash hit. Those fixes are cash costs at the time of the fix and have not been provided for as a cash reserve as far as I can see.

Assuming 500,000 cars need a fix this year at that average cost of $676 per car, then the cash hit will be $338,000,000. As more cars go on the road, the cash cost will go up accordingly. In addition to that is the car cost of servicing all cars still within the warranty period.

Unforeseen/unplanned costs. There is a supply chain shortage of many parts at present. Parts needed to fix cars recalled will mean less parts available to build new cars. At the last press conference, Elon Musk said they would be making production the priority this year and there would be no new model introductions in 2022.

External

The competition is not standing still. The supply chain problem affects them too but also gives them more time for testing the many new EV models all have under development thus eroding Tesla's early mover advantage even faster than would have occurred. All the big makers are spending billions on new EV and battery developments plus there are around 20 sizeable Chinese EV makers yet to show their cars to the rest of the world. I expanded on that in Tesla's Ticking Time Bomb.

Consumer low confidence: Some 63% of consumers now feel less comfortable, making a major purchase, like a home or a car, than they were six months ago according to a Forbes-Ipsos survey.

Forbes Advisor-Ipsos

Founder Over Confidence

According to insideevs.com, Elon Musk has said Tesla will be selling 20 million cars per year by 2030. The market worldwide is slowing according to this report by McKinsey. If that happens, the existing huge car makers will be fighting to maintain or gain market share even harder.

He has said of himself that he sets unrealistic timelines as this Business Insider report states.

At a certain stage, a business can only grow successfully if based on realistic timelines for the billions needed in investments to meet the sales forecasts the CEO makes!

Insider Silence is Deafening, I mentioned this in my opening summary: "Tesla's founder and CEO was a seller near the top and the Chairman of the Board has been a big seller too. There has been no insider buying since 2019."

It may also be telling that no insider has talked publicly - I did a wide search on this - about any of the points I mention above. If they were not as serious as I fear, then I would have expected them to allay those fears in words and in deeds by buying Tesla shares to demonstrate their confidence in the company and its stock market valuation. Instead, it appears as though the Investor PR department has been silenced and perhaps closed as I cannot find anything on the website other than legal filings and quarterly reports. That concern is deepened given Elon Musk's penchant for public speaking that seems to have died for now.

Investor Confidence and a Last Word

My guess is that many Tesla car buyers will not buy one again in an industry where brand loyalty is crucially important. The news about poor quality will soon spread and will deter new buyers. Also, Elon Musk's ambitions for sales growth were almost certainly unachievable before these problems became known publicly.

Investors do not have to be passive like the dummy drivers used in car crash tests. The plane below did not get saved by its autopilot, and if I had been a Tesla shareholder, I would have pushed the eject button a while ago as did the main pilot, Elon Musk, with his big sale.

HistoryNet.com

I would recommend that those who did not should do so soon before they get driven autonomously into a worse crash than has happened so far.

This article was written by

I am retired apart from managing family investments - mostly equities. I live near Zürich, Switzerland. I keep physically fit by walking and mentally fit by writing on philosophy, economics and politics. My writing is published internationally. My hobby is art - pencil on paper drawing. For those interested in my kind of art and political ideas I can be contacted at jbhanshaw@gmail.com.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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Source: https://seekingalpha.com/article/4486896-tesla-tsla-stock-driving-investors-autonomously-into-crash

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