Tesla Motors Inc (NASDAQ:TSLA) has had three fires in its vehicles since the beginning of October. That may seem pretty bad for a company that until recently hadn’t had any. However, Morgan Stanley analysts note that these fires don’t necessarily mean the Model S isn’t safe. They maintain their Overweight rating and $153 per share price target on Tesla but say they will keep an eye on the safety issues investors are now concerned about. They also make an interesting observation about drivers of the Model S because of who may be driving it now.
Why the fires aren’t that big of a deal for Tesla
Shares of Tesla Motors Inc (NASDAQ:TSLA) have been falling since the company’s latest earnings report this week and this third fire that was reported. But all in all, these fires aren’t such a big deal for Tesla and shouldn’t be a big deal for investors. Car fires happen, and the only reason Tesla’s car fires are making headlines is because the automaker went so long without having any.
ValueWalk's Raul Panganiban interviews Dan Pipitone, co-founder of TradeZero America, and discusses his recent study on retail investing trends. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with TradeZero America's Dan Pipitone ValueWalk's ValueTalks ·
All of these three reported fires were caused by accidents. The first and third fires happened after the vehicle went over a piece of metal in the road, while the second one was the result of a collision with a tree and a concrete barrier. The fires did not begin spontaneously, which is where the real fear lies in connection with a lithium ion battery.
What about an investigation?
When the first Model S fire happened, there were questions about whether the National Highway Traffic Safety Administration would investigate. If the agency does begin an investigation, an involuntary recall could be triggered, which would be a problem for Tesla Motors Inc (NASDAQ:TSLA)’s reputation. Morgan Stanley analyst Adam Jonas and his team note that if the NHTSA does launch an investigation, near-term worries about the safety of the Model S would be heightened even more.
They think it’s likely that Tesla has already started its own investigation of these three fires to look into what happens when the battery compartment is punctured. They say this would be “consistent with Tesla’s extraordinary efforts to build brand value and trust” with those who drive its vehicles. I would agree with them on this point because the automaker has been very up-front with consumers and even issued a very small voluntary recall for something that wasn’t a big deal not too long ago.
Tesla’s Model S retains its safety record
The analysts also note that Tesla Motors Inc (NASDAQ:TSLA) still gets to keep its safety record. The U.S. Fire Administration reports that there was an average of 194,000 highway car fires in the U.S. every year between 2008 and 2010. That’s about one fire for every 15 million miles. The Model S, however, has had three fires in 120 million miles driven or one every 40 million miles. Using this measure, they note that the Model S is more than two and a half times safer than the average vehicle.
However, they believe that most of the vehicle fires which have been recorded were in older vehicles, so this may not be an entirely fair comparison since the Model S is a much newer car. The average car on the road is 11 years old, so the analysts adapted their figures a bit. They marked three Model S fires in the last five weeks and annualized that to about 30 fires per year for a car which currently has 17,000 units on the road. That implies .18% of the Model S sedans on the road would have caught fire. When applying this number to the number of U.S. cars on the road, it suggests 440,000 fires per year or more than double the average frequency of the number of cars on the road.
In other words, it’s difficult to know exactly how Tesla’s Model S stacks up against newer cars in terms of fires since statistics include vehicles of all ages and it’s probably more likely that older cars are the ones which catch fire more often than newer ones.
Tesla’s cars appeal to a broad base
The Morgan Stanley analysts also make an especially interesting observation about the drivers of Tesla Motors Inc (NASDAQ:TSLA)’s vehicles. The Model S is a high performance sedan, and typically it would only compete with other high performance luxury vehicles. However, the fact that it is an all-electric vehicle means that people who wouldn’t otherwise buy a high performance sedan are purchasing the Model S. According to Jonas and his team, this may mean that many of the drivers aren’t accustomed to the high level of performance offered by the Model S.
“Are these relatively ‘affordable Ferraris’ driven by consumers who’s [sic] prior car was a Toyota Prius, a minivan or a balsa-wood bicycle?” they muse in their report.