Stockwatch: Tesla challenged by touchscreen woes
Electric vehicle recall has – so far – not hit the share price.
15th January 2021 12:18
by Edmond Jackson from interactive investor
Electric vehicle recall has – so far – not hit the share price.
Sometimes, anecdotal evidence and social behaviour can be more illustrative about the stock market than price-to-earnings (PE) multiples, bond yields and interest rates.
Last weekend, I was asked if university students were on to a good thing – ‘investing’ spare cash from cancelled university accommodation fees into electric vehicle maker Tesla (NASDAQ:TSLA) shares.
I think it shows how the speculative party may be near midnight and we should better prepare not to taste its dregs.
Tesla is requested to recall 158,000 cars
It did, however, prompt me to re-examine the company, which later last Wednesday came under fire from a US regulator - over recalling some 158,000 cars because their touchscreens can fail after a few years’ use, affecting safety. Such screens sit adjacent to the driver on a Tesla dashboard, consolidating the vehicle’s controls.
The issue has smouldered for a while – first reported in US media in October 2019 with an inquiry starting in June 2020.
Allegedly, it relates to memory chips used between 2012 and 2018. This ought to be fairly straightforward to resolve rather than a fundamental weakness able to compromise (confidence in) Tesla’s autopilot/self-driving features.
That is important, given autopilot is currently where Tesla has competitive advantage. In countries such as the US that is actually the main cost of the car after buyers have deducted various state kickbacks for buying electric. Such a pricing mix creates strong incentive to buy Teslas new, not second-hand.
Over the past year or so, the touchscreen issues have failed to resolve via online updates, and once warranties expire then owners have to replace expensive units. Quite like a, say, £700 smartphone or smartwatch, it begs the question how reliable – indeed safe – rapidly accelerating autopiloted cars could be, if we might only have a few years before a key feature fails.
Two German courts ruled against touchscreen safety
Meanwhile, in Germany last summer, a Tesla driver was convicted – and failed to win an appeal in a higher court – after he crashed his car while trying to adjust the windscreen wipers’ speed via the touchscreen. Normally, a driver can do this instinctively on a steering wheel stick, maintaining eyes on the road.
While I have not driven a Tesla, it amazes me to see the number of YouTube videos with elated drivers fiddling about on screens while tearing along a road. Yet mobile phone use behind the wheel is dangerous, even illegal in many countries. A ban is even being considered on ‘hands-free’ use by MPs, to avoid driver distraction.
Germany’s ruling is that Tesla’s touchscreen should be treated as a “distracting electronic device” just like a smartphone. By contrast, the emerging electric BMW 3-series has kept a more visible interface.
Limited effect so far, on confidence in Tesla stock
Despite the recall news breaking late on Wednesday, yesterday Tesla rallied in early trading but closed down 1% at $845 (£619). That capitalises Tesla at around $800 billion, representing about $1.6 million per vehicle produced (assuming guidance for about 500,000 annually) compared with $9,000 for General Motors – a near 180x differential.
It would appear there are plenty of Tesla drivers who find the touchscreen a natty revolution – part of their car’s uniqueness and justifying its premium cost. Well, many drivers used to telephone at the wheel, but no longer.
This week’s news may still be a gift to short-sellers, in the sense of there being no immediate hit to price. Sometimes, a market bubble can start to deflate than pop.
Akin to Kodak and Cisco in past technology booms?
Tesla may prove a long-term marketing success yet its stock is also a long-term investment tragedy, from current values.
Although I don’t see data to compare to the once-prized Kodak’s de-rating after the late 1960’s ‘nifty fifty’ stock-bubble burst, Cisco Systems (NASDAQ:CSCO) trebled in its last year of the 1999-2000 tech bubble and holders have yet to regain that high.
Tesla is a challenger in a larger market than networking equipment, but its stock chart shows a similar social phenomenon. This breaks out every 20 years or so, by the time a new generation of traders takes over.
Tesla’s meteoric rally started in mid-December 2019 from around $70 and accelerated to $170 two months later. The Covid-19 crash took it back briefly to $85, then an 8x multiplying in value during 2020 – making it the fifth-largest stock on the US market.
Social hysteria in stocks always expires
For me, such behaviour recalls AIM-listed BATM Advanced Communications (LSE:BVC) in the late 1990’s bubble, which soared from a few pounds to over £20. Despite objections from its corporate broker, I managed to attend a packed presentation of fund managers who were like disciples to the CEO’s vision of a new world of connectivity. This was a company poised to inherit the Earth, and doubters would be left behind.
Several big investment banks/brokers took over and BATM was promoted to over £70 until it burst with the wider tech bubble. A current price of 100p, is I believe, is helped by an historic stock consolidation.
That is a dramatic comparison, and I have no doubts Tesla will remain a very substantive and competitive player in the electric car revolution. It is no AIM stock. But the stark lesson is to beware social hysteria in control of valuation. It always expires.
Tesla Inc - consolidated income statements
Year-end 31 Dec
| $ million | 2017 | 2018 | 2019 |
|---|---|---|---|
| Total revenue | 11,759 | 21,461 | 24,578 |
| Cost of revenue | -9,536 | -17.419 | -20,509 |
| Gross profit | 2,223 | 4,042 | 4,069 |
| R&D | -1,378 | -1,460 | -1,343 |
| Admin expenses | -2,477 | -2,834 | -2,646 |
| Operating income | -1,632 | -253 | 80 |
| Interest expense | -471 | -663 | -685 |
| Other expenses | -125 | -113 | -104 |
| Pre-tax income | -2,209 | -1,005 | -665 |
| Taxation | -32 | -58 | -110 |
| Continuing operations income | -2,241 | -1,063 | -775 |
| Net income | -1,961 | -976 | -862 |
| EPS | -2.4 | -1.1 | -1.0 |
| EBITDA | -102 | 1,559 | 2,174 |
Source: Tesla accounts
Well-placed versus the German manufacturers
This week has also heralded news how in 2020, EU demands for CO2 reduction meant BMW, Daimler and VW tripled their output of electric vehicles – beating Tesla in Europe. Last year, VW sold 117,000 vehicles on the continent, versus Tesla delivering 96,000. BMW saw a 32% hike in electric vehicle output to 193,000, representing 8% of its global production.
The comparison is a bit unfair as Tesla has yet to establish European manufacturing. Plus, such is demand for its products, it runs a waiting list.
But founder Elon Musk wants to go ahead in Berlin and produce an upcoming Y model compact SUV. This is potentially an attractive transition towards mass-market vehicles rather than pricey ones, aimed at early adopters of electric cars (and those canny at exploiting state subsidies).
I suspect many potential buyers of electric cars are waiting both for the driving range to improve and prices to come down, helped by advances in battery technology and competition.
A fully electric VW Golf costs from £28,000 and offers a practical range of 125 miles, which frankly is not a lot of use beyond local driving. A Tesla 3 costs from £42,000 and takes you 250 miles, and the long-range model £49,000 for 350 miles. A £3,000 plug-in car grant from the UK government applies. Tesla drivers are said to have the advantage of Supercharger sites with 10-12 or more chargers, but as yet these seem sparsely located across the UK and tricky to rely on.
A potential short, and buy when the bubble bursts
All things considered – and despite Tesla currently being a play on social behaviour, hence impossible to predict in the short run – I think for experienced alert traders it merits trialling a small short position (say via contract for difference or spread bet).
The touchscreen issues are potentially disruptive enough to temper enthusiasm for the stock, leading enough edgy holders to lock in gains, hence a drop from these elevated levels any time.
A genuine investment view would avoid Tesla until its stock bubble bursts – which, as history shows, always happens – and watch how the competitive offerings evolve. Tesla has the advantage of having established superior driving range technology and could maintain this as adoption of electric cars continues. It is not therefore an outright ‘sell’ but on a long-term valuation view it might be prudent to lock in gains. Broadly at present: ‘sell’.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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