Tesla Proves, Once Again, That It Is A Must-Own Stock


Tesla (Shutterstock photo)Tesla (Shutterstock photo)

Some stocks, it seems, are just bulletproof. In the normal course of events, stocks react in a fairly predictable way to news. Positive things like better than expected sales or orders cause the stock to rise, while negatives such as problems with a product or the potential loss of key personnel cause it to fall. That is fairly obvious and usually true … unless that stock is Tesla (TSLA).

Yesterday, Tesla announced that they were initiating a recall of 53,000 vehicles due to a parking brake issue. Now there are two ways to look at that number. When compared to the 12.8 million vehicles that GM (GM) recalled in total in 2014 due to faulty ignition switches it is a mere drop in the ocean, and a muted response in the stock seems appropriate.

Or, from a different point of view, the 53,000 cars recalled represent around 70% of Tesla’s 2016 deliveries. From that perspective, and when consideration is given to the fact that Tesla is still growing and presumably doesn’t have huge reserves of cash for such contingencies, a much larger negative reaction would be perfectly logical.

In addition, Tesla CEO Elon Musk announced overnight that he has been working on Neuralink, a company that is designing an interface between human brains and computers. The implications of that news are huge. Musk claims that they are about four years away from a commercial product that would allow our brains to control computers and therefore, by extension, almost any machine.

Imagine, for example, getting into your Tesla, thinking “I need to pick up some milk” and the car takes you to the nearest milk purveyor, without any pushing of buttons, or even speech.

To some that is incredibly scary and to others it is the brave new world, but whatever your reaction, it is a remarkable and revolutionary idea and the potential of Neuralink looks enormous. From the perspective of Tesla stockholders though, the scary part of the news is that Musk stated that he envisaged running the Neuralink project himself and remaining as the company’s CEO.

One would expect tech investors, on hearing that, to think immediately of Twitter (TWTR), where CEO and founder Jack Dorsey’s dual role as boss there and at Square (SQ) is often blamed for Twitter’s relatively lackluster performance.

With Tesla though, what one would logically expect and what actually happens are often two very different things.

The five minute, five day chart above shows that when the recall was announced yesterday TSLA did indeed react; the stock dropped around one and a half percent immediately following the news. From the first perspective, as compared to GM’s 2014 recall that seems about right, but seen as a recall of around 70% of last year’s deliveries the reaction is muted to say the least. The chart also shows pre-market trades this morning, after the Neuralink news broke and, as you can see, there has been no reaction to that in Tesla stock.

This ably demonstrates the characteristic of TSLA that infuriates the bears, but in many ways makes it such a great stock: resilience. Investing in a company with as daring a vision as Tesla’s would be in most cases an incredibly risky proposition. The grand plan and rapid growth business model offers the potential for enormous rewards but would normally come with the risk that even minor setbacks could result in huge selloffs.

Tesla, however, is different.

I will freely admit that at various times in the past I have looked at TSLA and seen it as overvalued, even while recognizing the massive potential. What I did on those occasions was to judge it by conventional metrics and to expect the market to do the same. The reaction to the news over the last 24 hours has shown that that was then, and will continue to be, a mistake. The belief in the company is such and the potential so massive that bad news that would derail most stocks gets shrugged off. It is that resilience that makes TSLA a “must-own.”


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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