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Shrug Off Negative News, Tesla's Still a Buy

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Another Tesla (TSLA - Free Report) Autopilot executive has left the company for rival Waymo. According to media reports, Matthew Schwall is now a part of Alphabet (GOOGL - Free Report) company Waymo's safety team led by former National Highway Traffic Safety Administration (NHTSA) Deputy Administrator Ron Medford.

Tesla should feel the pinch here as Schwall was its director of field-performance engineering and the main technical contact on safety matters, dealing with regulatory bodies like the NHTSA and the National Transportation Safety Board (NTSB).

The departure follows that of Jim Kellar, Tesla’s Autopilot head in charge of building an AI chip, who moved to Intel (INTC - Free Report) in April. Its corporate treasurer and chief accounting officer also jumped ship recently.

It’s almost as if leading executives at the company are losing confidence in its ability to deliver self-driving technology, especially as the number of accidents involving Teslas continues to increase.

To be fair, Tesla has the maximum number of vehicles with some form of self-driving technology out there, so it makes sense that Teslas would also meet with the maximum number of accidents. Also, not every accident can be attributed to the self-driving tech because Autopilot may not have been in operation in all cases, or may have alerted the driver who didn’t for some reason take back control. So it would have been fooled only in some of the cases.

But each time there’s an accident, we go back to arguing about whether semi-autonomous is more dangerous than fully autonomous and essentially, whether AI can really ever be as good as a human being.

This WSJ article by Christopher Mims hits the nail on the head: “Deep learning — the “intelligent” component of these systems — is “brittle, opaque and shallow,” says Gary Marcus, a professor of psychology and neural science at New York University and the former head of Uber’s AI lab.

AI is brittle because it can’t carry over insights from one context to another, opaque because humans can’t evaluate its neuron-like tangle of connections, and shallow because it’s easy to fool. You can’t just throw more deep learning at a problem and expect it to be as good as a human, says Dr. Marcus.”

In short, the technology just isn’t there yet. Doesn’t mean it never will be. But it does mean that it will take time, and we don’t yet know how much more time. Waymo’s fully autonomous taxi service is already operational on a tiny scale, so maybe we’ll know soon.

Meanwhile, Musk has other things on his mind, such as Model 3 production volumes. Aside from the negative press and slumping share prices that’s doing the company no good reputation-wise and also in terms of its capital raising prospects, the company really does need to do more volumes if it wants to be profitable this year.

That’s probably why SVP of engineering, Doug Field is taking a sabbatical while Musk has a go at production responsibilities himself. Field has been overseeing both engineering and production over the past year to better align the two departments (another Musk experiment). A Tesla spokesperson told CNBC: "Doug is just taking some time off to recharge and spend time with his family. He has not left Tesla."

What Do The Numbers Say?

Analysts still expect Tesla to generate a 61% revenue increase this year as well as a 75 cent reduction in the loss per share. In 2019, revenue growth is expected to slow down to about 38% with the company finally generating a $2.46 per share profit.

Tesla’s revenue topped the Zacks Consensus Estimate in the last-reported quarter by 7.5% although the loss per share was just a couple of cents lower than expected.

What’s more, the primary driver of auto revenue growth of 19% from the year-ago quarter was the jump in Model 3 deliveries. Management said that first quarter 2018 orders were even higher than the strong orders in the third and fourth quarters of 2017, so buyer interest in the cars continues to increase.

The company delivered a total of 29,997 cars, of which 9,766 were Model 3s.

While gross margin improvements continue, there will be further improvements once the new automated production line in Germany is operational. So figuring out the battery module line and getting Germany online will help Tesla get to the magic 5,000 number and also help it generate stronger gross margins.


Tesla is currently the most-shorted stock, so there are a lot of bears out there. But for those willing to take a look at the numbers and consider that the shares are down 2.7% year to date, this may be just the time to accumulate the shares. Tesla currently has a Zacks Rank #2 (Buy).

Other stocks in the sector with the same rank are General Motors (GM - Free Report) , Fox Factory Holding Corp. (FOXF - Free Report) and PACCAR (PCAR - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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