Why Tesla Crashed and Burned Last Week

Why Tesla Crashed and Burned Last Week

Tesla Motors was one of the market's biggest losers last week after shares crashed more than 24% to a low of $132.32. It was a perfect storm moment for the electric-car maker, as Tesla's quarterly results failed to excite analysts and news of a third Model S fire swept the web. As if that wasn't enough, Tesla shareholders lost more than $4.7 billion in the process.

Deflating deliveries
The Palo Alto, Calif.-based company got off to a bumpy start earlier in the week after reporting third-quarter deliveries that were below what some analysts had expected. To be fair, Tesla delivered a record 5,500 Model S cars in the period, which was ahead of its own projections for 5,000 vehicles. Unfortunately, Wall Street was looking for something closer to 5,800. Looking ahead, Tesla hopes to deliver 6,000 Model S vehicles in the current quarter. However, this too is below analyst estimates for 6,600 fourth-quarter deliveries.

In spite of that, there were a few bright spots in last week's results. Tesla's gross margin of 21%, for example, was significantly higher than analysts' forecasts for 16%-20% in the period. This was particularly impressive because it didn't include the sales of carbon credits. Moreover, Tesla appears on track to achieve a gross profit margin of 25% in its fourth quarter.

Third-quarter revenue and earnings per share were also slightly ahead of estimates. Tesla posted a non-GAAP profit of $0.12 in the quarter on revenue of $603 million, which was better than the Street's estimate for EPS of $0.11. Not to mention, Tesla pulled off record free cash flow of $49 million in the quarter.

Unfortunately, strong margins and free cash flow weren't enough to stop investors from selling into the panic. Tesla's stock fell more than 11% on Tuesday's earnings news in after-hours trading. Things got worse for shareholders after a third Model S fire last week took even more air out of Tesla's tires.

Why Tesla can't afford to play with fire
A Model S car caught fire on Wednesday, after hitting road debris on a Tennessee highway -- marking the third Tesla car to catch fire in less than two months. The three drivers involved in these separate incidents were able to safely exit their respective cars thanks to an onboard safety system that notifies drivers in case of emergencies. In fact, as fellow Fool Daniel Sparks points out, the victim of Wednesday's fire says his Tesla saved his life.

All of the Tesla drivers involved in the recent fires say they plan to order new Model S cars. While that is certainly reassuring, the damage to Tesla's reputation could be far reaching. True, vehicle fires aren't an unusual occurrence. There are about 194,000 car fires each year, according to the U.S. Fire Administration. However, electric vehicles such as Tesla's Model S are still in the early stages of adoption, which makes Tesla more susceptible to negative press than conventional automakers.

While there's no doubt I'd rather be in a Tesla that catches on fire versus a traditional gas-powered car, the problem isn't safety. Tesla's cars are some of the safest on the road today. The real problem is how these fires might taint consumers' view of electric cars.

Tesla ended the week at $137.95, with 22 million shares having traded hands on Friday -- that's nearly double the average daily volume for the stock. Nevertheless, despite last week's setbacks, Tesla is still up more than 307% year to date. With shares now trading 27% below the stock's 52-week high, this is a good entry point for patient investors who can hold the stock for the next five plus years, particularly as Tesla readies production of its Model X EV.

Upside from here? Absolutely
Looking ahead, international expansion into China, the world's largest auto market, should drive the stock higher. Tesla plans to enter the region as soon as the first quarter of fiscal 2014. The company is also accelerating deliveries into Europe. These catalysts along with the upcoming launch of Tesla's Model X should fuel growth for Tesla.

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The article Why Tesla Crashed and Burned Last Week originally appeared on Fool.com.

Fool contributor Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends and owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published