THE SEATTLE FIRE: A CHINK IN TESLA’S ARMOR?

10/3/13

News of a Tesla Model S’s catching fire near Seattle after being struck by roadside debris, and the inevitable accompanying YouTube video thereof, has helped send Tesla shares (TSLA) down more than $20 from their all time high close of $193.00 on September 30.  The company is looking into the incident (I’ll bet it is!) and, so far, has emphasized that the fire was caused by road debris, not spontaneous combustion, and that no one was hurt.  The design of the car, the company further points out, prevented the fire from spreading as quickly as it otherwise would, helping to protect the driver of the vehicle.  

This fire may be much ado about very little.   Cars burn up all the time.  And every conventional car contains a fuel tank filled with, in most cases, gasoline, which is about as flammable a substance as one can imagine.  But the Tesla fire has caught people’s attention for several reasons.  First, this is new technology.  People are leery of new technology and new technology, almost be definition, holds more unknowns than older, more conventional technology.  Second, there are plenty of people gunning for Tesla for whatever reason…they are scoffers at the new technology and/or they are short Tesla stock.   Third, and more disconcerting, is that firefighters reported that they needed several attempts to extinguish the blaze because the car kept reigniting.   Marry this to the fear of technology, and one can see why people, or at least investors, are jittery.

Regular readers know that I am no big fan of Tesla, or, more properly, of TSLA stock.  See

IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA)

5/30/13

and

TESLA (TSLA):  THE GREENIES ARE CHARGED UP, BUT…

5/23/13

Despite my antipathy toward the stock, I am not at all gloating, as doubtless some are, about the fire.  This is serious business and people could have been hurt.  Further, the technology behind Tesla is both intriguing and promising; it is good obviously for the company and its shareholders but also for the entire car industry and for the nation as a whole.  I am thus pulling for Elon Musk and his cohorts, as we all should be.

From a purely financial standpoint, having been burned by betting against Tesla stock (I owned, and watched expire, puts on TSLA at $85, more than $100 below its peak price.  Sheer genius.  Fortunately, I wasn’t betting serious money on this proposition!), I am no longer short the stock or long puts on TSLA.  It’s too risky to take such positions, the financial equivalent, so far, of standing in front of an oncoming freight train.

However, the fire has reminded me of something I wrote back in that 5/23 piece…

Maybe a GM, Ford, Toyota, Nissan, Honda, or VW can make better use of the TSLA’s technology than can TSLA, but does anybody really think TSLA knows something these guys don’t?

It’s fashionable to bash Detroit, and maybe its Japanese and German equivalents, as a bunch of old line metal benders hopelessly out of touch with the newest trends in technology, luddites mired in the miasma of another age of belching dinosaurs and antiquated ideas.   The contrast, in this view, with the forward, modern, next century thinking of the likes of Elon Musk could not be more stark.   Such thinking, however, is flat out wrong.  There are a lot of very smart people working in Detroit specifically and in the global auto industry in general.  It is therefore very difficult to believe that Mr. Musk, as bright as he is, has figured out something that his competitors haven’t. 

Simply put, the technology behind the Model S and its upcoming corporate brethren cannot be as flawless and perfect as its most ardent adherents believe it to be or the guys in Detroit, Hiroshima, Munich, Wolfsburg, and Toyota City would have come up with it, and put it on the market, by now.  There has to be a reason that Detroit and its competitors have not embraced this technology, and it isn’t obtuseness on their part.

Maybe the fire will lead us to that fly in the ointment.  Or maybe it’s something as simple as the Tesla’s being, for the foreseeable future, a car for the relative handful of people who can afford to spend $70,000 on a third car; hence the enthusiasm for it on Wall Street and in Silicon Valley.  Or maybe everything people say about the car is true; it is the modern day equivalent of the perpetual motion, or perhaps the time, machine.  But the fire outside Seattle has people thinking…and looking for possible chinks in Tesla’s armor.

At any rate, even if the car is what its most ardent acolytes believe it to be, TSLA stock is still expensive.  However, betting against it has been a chastening experience for those of us who have tried it.   So I can’t be accused of talking my position…at least not at this juncture.  If I can find an attractive entry point, I might place a prudent bet against TSLA again, if such a thing becomes possible.

TSLA:              $170.64

PRICE REDUCTIONS ON THE VOLT: THE CARMAKERS DOUBLE DOWN ON PLUG-IN TECHNOLOGY

8/6/13

As long time readers know, I have not always written favorably of the Chevy Volt and its kindred cars.   However, my problem with the Volt had little to do with the car itself, which is both relatively fun to drive and a technological marvel.  My problems with the Volt had just about everything to do with the inability of the numbers to work at anything like the car’s $40,000 sticker price, thus limiting its appeal to ostentatious greenies, a very limited market.

However…

Apparently, no one in the Volt’s short life has ever paid sticker price for the car, as far as I can tell.  A good buddy of mine leased one when they were relatively new at a monthly payment that reflected a sale price nowhere near its sticker price; in fact, if you played with the numbers, the lease had to be based on a price at which one could buy a similarly equipped conventional, mainstream mid-sized car.  At those numbers, the Volt makes a lot of sense, provided one drives more than a modest number of miles per year. 

GM has finally acknowledged reality, but not completely, by reducing the sticker price of the Volt by $5,000 to $35,000.  This is in line with a general trend of automakers’ reducing the prices, through very attractive lease deals and outright reductions of sticker prices, of their plug-in hybrids and pure electrics due to a very slow market for these cars.   GM says that reductions in the cost of manufacturing the Volt contributed to the decision to reduce its price.   This may be true, but Economics 101 tells us that it is weak demand at current prices, not falling costs, that leads to reduced prices.  If GM didn’t have roughly twice the normal inventory of this car sitting on dealer lots, it wouldn’t be reducing prices in response to a reduction in its costs of production; it would be maintaining prices and pocketing the reduction in costs.

So GM, Ford, Honda, and Nissan have reduced the prices of their plug-in offerings, making it easier for people to get into these cars.  However, these reductions in prices have trashed the resale value of these cars.  The Wall Street Journal reports this (Tuesday, 8/6/13, pages B1 and B2) morning that the trade-in value of a one year old Nissan Leaf is down 25% from a year ago; the trade in value of a one year old Volt is down 21%.   This cratering in trade-in values will have two effects.

First, it will, or should, infuriate those who bought plug-in vehicles, increasing their  overall costs of ownership and thus incurring ill-will for the car companies while providing another reason for people to sour on hybrids or electrics.

Second, and perhaps more insidiously, the incentive to lease, rather than buy, these cars will increase.  Even before these price reductions, as my friend who leased the Volt pointed out, it made little sense to buy a car in a period of rapidly advancing technology; better to lease and let the lessor take the risk of obsolescence.  (Yes, my buddy is a very smart guy.)  Now with the carmakers reducing prices in response to slack demand, the near absurdity of owning these cars has been exacerbated.   Unless the terms are heavily skewed away from leasing (They run in the other direction currently.), any thinking person will lease his or her plug-in hybrid or pure electric.   Thus, the ultimate lessors (the car companies, either through captive finance companies or the heavy subsidies they pay to third party lenders) will bear the risk, either of rapidly advancing technology and attendant obsolescence or of simply a cool reception in the market place, of owning these cars.

Not only, then, are the car companies taking a gamble by making and marketing these cars; by making leasing the only logical way for people to get into these automobiles, the companies are doubling down on their bets by making themselves the second owners, the receptacles, if you will, of these vehicles that may very well be obsolete or simply unwanted in the marketplace.

The impact on the stocks of these companies should be miniscule; electrics and plug-in hybrids are a very small part of their business.  But the implications for the technology of such vehicles, which still looks transitional, and perhaps for the company that specializes in such cars, Tesla (TSLA; See my 5/30/13 and 5/23/13 pieces, IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA) and TESLA (TSLA):  THEGREENIES ARE CHARGED UP, BUT…), could be profound.

IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA)

5/30/13

Writing about and/or commenting on Tesla (TSLA) is a lot like writing or commenting on Apple (AAPL).   Neither of these appears to be a stock; both instead appear to be religions.   People have decided they love one (or maybe both) of the company’s products, and therefore the stock, and no one can talk them out of that position.   Not surprisingly, then, my 5/23/13 post TESLA (TSLA):  THE GREENIES ARE CHARGED UP, BUT… in which I questioned (Some who aren’t used to reading my material said “bashed,” but I thought I was quite balanced in my assessment.) the Tesla Model S and expressed my misgivings about the stock at a much lower price ($92.71) than that at which it closed today taught me that if you want to draw attention to your writing, write about TSLA. 

The big announcement today from Tesla Chairman Elon Musk, the announcement on which people had been anticipating for weeks, was that Tesla will triple the number of supercharging stations by the end of next month.  Within six months, Tesla will have covered most of the country’s major metro areas with superchargers and will enable people to cross the country diagonally from New York to LA without fear of losing power…and all, presumably, on Tesla.  By a year from now, the whole country should be covered…no more range anxiety.   Also, the charging network will have some kind of solar backup so Tesla owners will be able to charge their cars even if the electrical grid goes down.

A supercharger, by the way, enables drivers to, within twenty minutes, charge their cars to the point at which they can be driven three hours.   Twenty minutes is longer than it takes to fill a conventional gasoline tank (about four times longer), and if I fill my tank in five minutes, I can drive five or six hours before having to stop to refill.  But Tesla’s getting close to being practical with their supercharging systems…and that’s impressive.  And, lest I draw even more brickbats than I anticipate, I will also add (again) that most of the buff books, especially Motor Trend and Automobile, and Consumer Reports LOVE the Tesla Model S.  Yours truly has not driven it; despite my love of test driving (See my already seminal 5/20/13 post, I TEST DROVE A KIA TODAY…), I cannot in good conscience go into one of the few showrooms in the area and test drive a car I could not possibly afford.

The first reaction of the suitably skeptical and cynical investor (or car buyer) should be to question whether Tesla can pull off such a feat.  A nationwide system of superchargers that can be conveniently accessed would be a titanic accomplishment.   And even if it can be achieved, 20 minutes for three hours of driving, while impressive, still adds a lot of time to long trips and renders the Model S not the vehicle of choice for anything but driving around town.  At $70,000 (Okay, $62,500 after tax credits.), one would like to not have to buy a second car for long trips. 

A few more questions.

According to reports, the juice that Tesla owners get from the superchargers will be free, provided by Tesla.  That can’t be right, can it?   Why not charge the drivers for the relatively cheap electricity?  It would seem that people who are rich, and/or silly, enough to shell out $70,000 for a car should have no problem paying for the electricity necessary to power their status symbols.   But if Tesla is indeed picking up the charge for the charge, if you will, how much will that cost Tesla?  A wise guy answer would be something like “at the volumes TSLA is looking to sell, not much,” but it is something to think about.

And, on a broader scale, if I am wrong and this electric car fad really catches on with the Tesla, the Nissan Leaf, and various other pure electrics capturing the American imagination, how will our electrical grid handle it?   One could answer that if we reach that point, Tesla will have been a resounding success, but not only do stocks discount the future but also the country will have to do something about increasing electrical supply, in a relative hurry, in a nuclearphobic world.  No mean task.

Even if we assume that TSLA can fulfill its promise of covering the country with superchargers by a year from now, which is quite a brave assumption even for someone as widely and justifiably admired as Elon Musk, questions remain.  And it still looks like TSLA is a company selling cars that use a transitional technology, cars that only a few people want and even fewer can afford.   And, yes, I realize that TSLA is a luxury car maker (Its lower priced models, which still won’t be cheap, aren’t supposed to come out until 2017 (See today’s announcement.) and, right now, at least, TSLA doesn’t have the money to develop and produce them (See my aforementioned 5/23/13 post.)) and not everyone can afford luxury cars.  But TSLA is a luxury car producer, indeed, a boutique luxury car producer, aiming to sell 20,000 cars this year in a 15 million car market, with a market capitalization of $12 BILLION!   By contrast, other car companies’ market caps are as follows:

Ford                             $61 billion

GM                              $48 billion

Daimler                        $67 billion

Toyota                         $191 billion

Honda                          $70 billion

Nissan                          $47 billion

Volkswagen                 $76 billion

The comparisons are not perfect, but they are a lot more apt than the comparison the bulls are throwing around to AAPL’s $426 billion market capitalization.   Does it make sense that a company that might sell 20,000 cars this year is trading at ¼ of the value of GM, which sells ten times as many cars, in the U.S. alone, in a month?   Again, this is not the best metric around, but just think logically here.

Is this the time to sell TSLA?   Though I’ve taken a small put position, just to focus my thinking, I don’t know.   And to prove that I don’t know, I bought my July puts on May 21 when the stock was trading at $88.24; it’s now trading at $104.95 and I am down well over half on my position.  The stock has doubled in the last month and has tripled in the last six months.  Somethin’s gotta give.  But, as I’ve said before, markets, and stocks, can stay rich a long, long time.   See my 5/9/13 post, OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.  And perhaps stepping in front of this freight train is not advisable; note how TSLA has defied, so far, the old “buy on rumor, sell on fact” adage in the wake of today’s supercharger announcement.

As for yours truly, I’m going to wait around a little while before I dump my puts.   Even trading, like investing, should be done with patience, understanding the relative nature of that term.   And, as a further warning, I am a far better investor than I am a trader; accordingly, I have so little in this trade it won’t make much difference one way or the other.

TSLA:              $104.95

S&P 500:         1,654.41

Dow                 15,324.53

GM:                 $34.64

F:                     $15.90