Tesla Warns Warranty Will Hurt Earnings

Cars and Drivers

Published: August 17, 2014 9:17 am

Last Updated: August 18, 2014 6:57 am

Tesla Motors Inc. (NASDAQ: TSLA) did something good for customers that will be bad for investors. Like many other successful companies that put customers first, Tesla management has to hope that strong service for the owners of its cars eventually will turn up in its share price.

Tesla CEO Elon Musk does have a long runway with investors. Shares in the company are near an all-time high, trading at $262, just shy of the $265 peak and well above the period low of $116. Wall Street has given Tesla such huge benefits of the doubt that it has a market cap of about 50% of Ford Motor Co. (NYSE: F). Perversely, a new improvement in warranty on the cars, which may hurt the bottom line, may push shares higher.

Musk, in a blog post, described the benefit to owners, and the possible pressure on shares:

The Tesla Model S drive unit warranty has been increased to match that of the battery pack. That means the 85 kWh Model S, our most popular model by far, now has an 8 year, infinite mile warranty on both the battery pack and drive unit. There is also no limit on the number of owners during the warranty period.

Moreover, the warranty extension will apply retroactively to all Model S vehicles ever produced. In hindsight, this should have been our policy from the beginning of the Model S program. If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that.

And:

To investors in Tesla, I must acknowledge that this will have a moderately negative effect on Tesla earnings in the short term, as our warranty reserves will necessarily have to increase above current levels. This is amplified by the fact that we are doing so retroactively, not just for new customers. However, by doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident that it will work out well in the long term.

Another demonstration that Musk will take his chances with Wall St. as he builds loyalty.

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