Tesla pushes the limits of the automotive sector

By Chris Lau for Kapitall

Tesla (TSLA) is pushing the limits of product quality in the automotive sector. In an era where massive recalls plague companies like GM (GM), Tesla is extending the warranty for its Model S to eight years. That means Tesla feels the battery in the Model S will last at least that long. The cost of replacing a car battery can run from $5,000 to $12,000. Tesla’s stock is now at all-time highs. Should higher costs implied by a longer warranty be hurting Tesla’s stock?

Tesla acknowledged the longer warranty will have a negative effect on earnings in the short term, but the offering will boost the company’s brand name. The automobile is a premium, luxury product. By guaranteeing its quality, Tesla improves brand quality significantly. Demand is so strong that profit margins should offset any potentially higher costs down the road.

Tesla outperforms peers in a short amount of time:

With Tesla pushing the boundaries on quality, investors should expect other firms to follow. Toyota and GM will need to step up on quality and service for its premium products, or risk losing sales to Tesla over time.

Tesla closed at near 52 week highs, but bearishness persists. Short float is a lofty 25.42 percent. Tesla is not a suitable investment for the faint of heart. Its valuation implies astronomical demand is sustainable. Conversely, Toyota trades at a moderate P/E of 10, similar to that of Honda Motor (HMC). Both companies also offer a dividend yielding 2.02 percent and 1.15 percent, respectively.

It will be a while before all-electric vehicles become main stream. For now, hybrid cars are the next level vehicles for environmentally conscious consumers. While Tesla continues its move up, Honda and Toyota should still make sound investments.

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