​Tesla’s Unscalable Quality Control Revelation Cause of Extreme Share Price Decline

Michael Markowski  |


Tesla  (TSLA) shares traded as high as $361.50 on July 2, 2018. This was after its founder Elon Musk declared that Tesla was finally a “real car company”. The declaration was prompted by Tesla’s meeting its goal to produce 5,000 Model 3 sedans per week for the quarter ended June 30, 2018. Since then most of Tesla’s fans and shareholders have been perplexed. Based on the good news everyone had anticipated that its share price would hit new highs. Instead, the share price did an about face and closed for the week ended July 7 at $308.91, representing a price reversal of more than $52 per share from the week’s high.

Tesla’s shares selling off on the good news did not surprise me. The explanation that Tesla gave to USA Today for its July 3, 2018 article entitled “Tesla dropped new car braking test in final days of production goal about Tesla’s ceasing its quality control for brakes on the assembly line was telling. The company explained that the brakes did not require assembly line testing since Tesla has had a policy of in place that every car that it manufactures be test driven. Tesla has the luxury to test drive every car it produces since it manufactures approximately 500 cars per day.

Any savvy investor who learned about the driver every car policy would have sold their shares. The quality control revelation speaks volumes about Tesla’s manufacturing process not being scalable. Assuming that Tesla can eventually produce the same annual volume of vehicles as Ford  (F) or General Motors  (GM,) which produced 6.6 million and 9.6 million vehicles respectively in 2017, it will need to do the following:

  • Hire drivers to test drive the 38,000 cars manufactured every day.
  • Purchase real estate to build several dozen race tracks near its factory to test its cars.

Tesla’s not having a scalable quality control in its manufacturing process is a logistics nightmare for the company. This is a big issue for any investor. It’s especially since Tesla is being valued by investors as a highly scalable manufacturing company. Tesla’s market cap based on its July 6 close is higher than Ford’s and lower than General Motors.

Tesla’s test-driving-of-all-new-cars policy begs two questions:

  • What other quality control issues does the test drive address?
  • Is the cost of test driving the vehicles and fixing the problems accounted for in its Cost of Goods (CGS) or Sales, General and Administrative (SGA) expenses?

In my future articles, I will attempt to address both questions. To be alerted when my next report or article is published about Tesla go to www.BullsnBears.net and register for the FREE alerts.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TSLA Tesla Motors Inc. 337.03 -11.39 -3.27 7,099,999 Trade
GM General Motors Company 34.90 0.24 0.69 8,492,444 Trade
F Ford Motor Company 8.47 -0.03 -0.35 38,262,962 Trade

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