After Earnings Report, What Tesla Stock Investors Should Study

Thursday, July 23, 2020

#Functional Safety    #Quality

From Jaguar’s History Book

In the past month, Tesla TSLA +0.8%’s stock has been on a steady incline that rivals Pike’s Peak; rising from approximately $1000 per share in mid-June to over $1760 last week (on July 13th). There have been several reasons for the rise including Tesla’s rumored inclusion into the S&P 500, CNN talks about it potentially hitting $2000 per share, Roth Capital raising its rating to the equivalent of “Buy”, and Barron’s discussing Tesla’s valuation as being upwards of $300B. Today, Telsa reported over $6B in revenue for Q2 which is a fourth straight quarter of profits despite a pandemic, therein likely causing another stock ascent at market opening as drooling investors look to join the mountainous climb.

At the same time, though, Tata Motors – the owner of the Jaguar brand since 2012 –appears to be in the valley beyond the mountain: a price per share of approximately $7 per share, which is half of January’s price and has barely moved in the past month. Jaguar itself peaked in U.S. sales in 2002 with 61,204 units and has only averaged under 21,000 units per year for the past decade. Just like Tesla, Jaguar started in the luxury sedan realm with sleek designs, a higher price point and limited selection, yet its U.S. sales and stock seems contradictory to Tesla. Why? Is there a chapter of the Jaguar history book that Tesla stockholders should be reading?

The very simple answer: “The chapter entitled ‘Poor Dependability.’”

Many moons ago, Jaguar vehicles were the rare, sleek and hand-crafted imports, which carried with it a cultural allure, but also meant the manufacturing repeatability and quality controls were almost non-existent. In the early 90’s after decades of worsening quality issues, J.D. Power & Associates’ Initial Quality Study (IQS) reported that Jaguar had nearly three times (3x) the defects of its competitor and industry leader, Lexus and nearly 50% more than Mercedes-Benz. In fact, as Fortune Magazine reported, the historical joke had been ''Jaguar owners need two cars: one to drive and one for spare parts.'' 

In 1989, Ford Motor Company bought Jaguar and began a revamping of its product development specifically in order to inject reusability; both for piece cost and quality control issues. Ford’s eventual CEO, Alex Trotman, stated, “We want to be careful to preserve the unique identify of Jaguar, so we tread very carefully in using our manufacturing expertise and so forth,” but the message was clear: continuing down the road of subpar quality was unacceptable. By 2008’s IQS, Jaguar had jumped into the top 10 brands in a virtual tie with competitors such as Cadillac and Lincoln. Unfortunately, though, Ford itself fell on hard times and had to sell Jaguar in 2008.

Despite Jaguar ongoing focus on improved quality (e.g. 2nd overall brand in 2012), the reputation continued to plague them. In fact, in 2015, executives of Jaguar confronted this head on by speaking frankly about their brand’s ill repute. President and CEO, Joe Eberhardt, said publicly, “The times of bad cars are over. This is the next generation of Jaguar, but we [also] need customer confidence to get there.”

Unfortunately, though, it took five more years for customer perception and Jaguar’s IQS score to align. They were finally reacquainted again in 2020, but not because of soaring opinion but rather because of diminished quality again: sixth worst out of the thirty-two brands measured. Yes, the Jaguar E-Pace was the first model to earn an IQS award, but the overall brand reported 190 problems per 100 cars in the first 90 days of ownership, which was approximately 40% more issues than the tied-leaders of Dodge and Kia.

So what does this have to do with Telsa stock? Just like Jaguar, Tesla has enjoyed the revenues from affluent customers looking for differentiation. But just like Jaguar, it has suffered from quality issues. In 2018, iSeeCars.com compiled 500,000 safety-related complaints across 400 models and Tesla was the 3rd worst brand with 49.6 complaints per 10,000 cars sold. And in 2020, Tesla was included in J.D. Power’s IQS for the first time and finished dead last, which is a horrible choice of words given multiple, public fatal accidents in the past twelve months.

So stockholders beware: look for near-term actions by Telsa executives to not just bring cool, differentiated features to market like fully-autonomous vehicles, but more importantly to address the systemic quality issues. They need to demonstrate upfront, quality-driven methodologies with the same laser-focused, customer-centric mindset they bring to styling.

Otherwise, the stock’s valley is on the horizon.

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