Tesla's Recalling Over 350,000 Vehicles: Should You Hit the Brakes on Tesla Stock?

Tesla (TSLA -5.70%) is recalling more than 350,000 vehicles equipped with its driver-assist software in response to government concerns that the system could cause crashes.

The fix, at first glance, appears relatively straightforward. But it involves software that Elon Musk said last year was “essential” to the company’s survival. And it could open the door to further questions surrounding Tesla’s Autopilot systems.

There is no reason for investors to make a “sell” decision based on the headlines, but this is a situation that Tesla shareholders need to monitor closely in the quarters to come.

Autopilot hits a speed bump

In a recall notice published Thursday, the National Highway Traffic Safety Administration (NHTSA) said that Tesla’s full self-driving software package “may allow the vehicle to act unsafe around intersections,” adding that the system “may respond insufficiently to changes in posted speed limits or not adequately account for the driver’s adjustment of the vehicle’s speed to exceed posted speed limits.”

Tesla in response is voluntarily recalling the vehicles, with plans for an over-the-air software fix. The vehicles affected include 2016-2023 Model S and Model X, 2017-2023 Model 3, and 2020-2023 Model Y vehicles equipped with the Full-Self Driving beta.

Despite the name, “Full Self-Driving” does not make a Tesla autonomous, and the company has long dealt with questions about its marketing of the system and how its owners use it. The software has been a lucrative add-on for Tesla: The option currently costs $15,000 up front or $199 per month in the United States.

Tesla offered no comment on the NHTSA announcement. Tesla according to the notice has identified 18 warranty claims potentially related to the conditions described by the NHTSA, and it isn’t aware of any injuries or deaths related to those situations.

The risk goes far beyond this announcement

Shares of Tesla were largely unchanged following the announcement, perhaps because of the relatively simple fix offered in the recall notice. Automakers routinely deal with recalls to fix a range of problems, and Tesla is no exception.

But that doesn’t mean investors can be asleep at the wheel. The Autopilot or Full Self-Driving technology is a key part of the bull case for Tesla, and a major reason the company boasts a valuation that dwarfs the rest of the industry. Musk, in a 2022 interview, said that it is “essential” that the company solves full self-driving, saying “it’s really the difference between Tesla being worth a lot of money or worth basically zero.”

The NHTSA said in its statement it will continue to monitor the recall to ensure Tesla’s remedies are effective, and noted that a broader investigation of Tesla’s software systems remains open and active. Government officials have said they are concerned that the technology might make drivers less-attentive than what is needed to be safe.

There is also a risk that Tesla might eventually need to invest in new hardware to satisfy government concerns, which could mean either refunds or costly upgrades to hundreds of thousands of vehicles already on the roads whose owners have bought the service. And some of the conditions contained in the recall could make Autopilot less appealing to consumers, for example language requiring Autopilot to limit Tesla vehicles to the posted speed limit.

Keep your hands on the wheel

There is nothing in this news to suggest Tesla is going to zero. But Tesla is going to have to navigate past this period of government scrutiny for the stock to reach the potential some believe it has. Last year, Cathie Wood’s Ark Invest said Tesla shares could be worth as much as $4,600 apiece — more than 20 times the current price — by 2026, assuming robotaxis are in service by then.

Even in Ark’s bear case, which puts the price of Tesla shares at $2,900, assumes about $50 billion in autonomous revenue by 2026.

With the government taking action, Tesla is likely to spend more time reworking its existing systems and less time pushing the envelope further, meaning the odds decrease that the company will hit Ark’s futuristic goal by that 2026 deadline. And that makes other Tesla initiatives, including its Cybertruck, all the more essential to growth.

Tesla investors need not get off the road, but they should buckle up in anticipation of a rough patch up ahead.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.