Bears are haunting shares of Tesla Motors, Inc. (NASDAQ:TSLA) since the report of fire accident that damaged a Model S, triggering rumors that the vehicle's battery caused the incident. However, the company said that the particular Model S collided with a large metallic object in the middle of the road and caused significant damage to the vehicle.
It is unknown what actually happened, but this was enough to create panic selling among investors, dragging down the stock more than 6 percent and handing its steepest decline since mid-July 2013 when it fell 14 percent.
The accident (this is the first fire in a Tesla vehicle) comes after the National Highway Traffic Safety Administration (NHTSA) awarded Tesla's Model S the highest overall vehicle safety score ever, earning a new combined record of 5.4 stars.
The Model S, which is on-track to hit sales of over 20,000 units this year, is the best-selling U.S. electric car despite high starting price of $70,000 before a federal tax credit. The company sold 5,150 cars in the second quarter and expects to sell 21,000 cars this year.
The incident did some damage to Tesla's reputation of producing safe cars and doubts raised over its 85 kilowatt-hour lithium-ion battery, which is underneath the passenger compartment floor. The battery fire reminds investors of a similar issue with Boeing's new 787 plane.
Boeing Co. (NYSE:BA) still has not entirely come out of the fire risk in its ambitious plane that was grounded earlier this year as its lithium-ion batteries overheated or caught fire. Flights resumed four months later after a revamped battery system was installed. Last week, another Dreamliner was grounded after only a few weeks in service.
Even GM's Chevrolet Volt plug-in hybrid cars faced battery fires two years ago after crash-testing, but the regulators determined that the Volt was no riskier than vehicles with conventional gasoline engines.
However, the incident dampened the Volt's reputation and reduced sales, whi! ch posted a recovery only recently. GM sold about 17,000 Volts through September.
Although Tesla has not completed a full analysis of the incident, they do believe that the battery pack was damaged in some way and was the cause of the fire. The company is expected to release a series of statements over the next few days, detailing their analysis and findings.
On the flip side, the negative news flow and investor concern over the impact to demand of this incident will put negative pressure on the stock in the near-term.
"These are meaningful concerns, as this is a new technology and one in which sensitivity to safety risk is very high," Deutsche Bank analyst Rod Lache wrote in a note to clients.
The fire happened after 83 million miles of Model S driving, 12 significant accidents, and extreme crash testing by U.S. Safety regulators. Although more details are needed on the exact reasons behind this incident, and it could certainly be best to eliminate the chance of a fire completely, Tesla believes that the frequency in which an accident propagates a fire is similar in an internal combustion vehicle.
Tesla's ability to monitor the vehicle systems remotely will enable a detailed report on the cause of the incident.
"If this had been a spontaneous incident with no catalyst (i.e. in someone's garage), the impact would be significantly worse, Given significant Roadster and Model S experience (6 years, tens of millions of miles driven) without a fire, we have confidence that this is an isolated incident that could happen to any vehicle," Lache said.
Like Lache, we hope that this will be a one-off event for Tesla, and there should not be any repetitive incidents as is the case with Boeing.
Moreover, shares of Tesla had rallied 517 percent in the last one year limiting further upside unless there are some real catalysts to push the stock up. R.W. Baird analyst Ben Kallo, who downgraded the stock to "Neutral" from "Outperform," said that the company has "significa! nt milest! ones" to overcome in the next year and a half.
As a result, the stock could be pressured in the near-term unless Tesla gives a detailed explanation of the incident to the satisfaction of the Street.
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