Is Tesla's Recent Failure Just the Beginning?

One four-letter word best summarizes the formula behind Tesla's (NASDAQ: TSLA) success: hype.

That same four-letter word applies equally well to its founder and chief, Elon Musk, who has used hype and his big, bright smile to take his company from startup to world-beating auto brand.

If Steve Jobs delivered innovation, then hype is certainly Musk's contribution to the world of modern consumer technology.

Not that hype doesn't have its place, but there's a catch: Every so often, hype has to meet reality, and that's exactly what's happening at this very moment.

Tesla claimed that sales of its cars leaped 25% in the year's second quarter, hitting 14,370 units, but that was still well short of the expected 17,000.

Deutsche Bank analyst Rod Lache commented in an open letter to clients: “At a high level, while we are modestly disappointed by the number, we are not shocked. This is not the first time Tesla has missed an aggressive target.”

Big Promises... Small Deliveries

Aggressive targets, or, in layman's terms, big numbers, have always been the name of the game when it came to Tesla's iconic founder — so disappointments have also been a common feature of its rise.

Musk famously predicted half a million units sold by the year 2020, but for the company to hit the necessary pace, sales in the second half of 2016 would have to more than double sales for the first half.

The chances of that happening are growing smaller by the day.

But is there a grander, more final disappointment awaiting Tesla and its fanatical supporters and shareholders at the end of this ride?

More and more these days, that answer appears to be "yes."

Its technology is valid, but not quite as world changing as its bipolar CEO would have you believe.

In 2015, Musk went on the record saying: “I think we have all the pieces, and it’s just about refining those pieces, putting them in place, and making sure they work across a huge number of environments—and then we’re done.”

Last week, however, that optimism proved shortsighted as a Tesla Model S operating in "autopilot" mode plowed headfirst into an oncoming truck, costing the rider's life.

While Musk expects his self-driving cars to be on the roads en masse by 2017, other experts in the field, including Nidhi Kalra, senior information scientist at Rand Corp., believe that millions of miles and perhaps "dozens of years" of testing will be required to fully qualify this technology for mass consumption.

Par for the course for anybody who has been following Musk's statements over the years, but where does it end, exactly?

Well, Tesla's biggest piece of hype, and perhaps the one that can cause the most damage in the long run, isn't its cars at all, but the other major line of products: the Powerwall.

A Big Battery; An Even Bigger Story

As is usually the case with Musk's big proclamations, the truth is visible just under the surface.

Announced by Musk last year, the Powerwall domestic energy storage system promised to change the face of the modern power grid by allowing the end consumer to create and manage more and more energy.

Pre-orders in the first weeks after its introduction allegedly totaled close to $1 billion, leading Musk to go public with another statement: The Gigafactory, which had been created to provide Tesla with all the battery-making capacity its cars required, wouldn't be enough to satisfy demand for both lines of products.

It seemed like another home run for the superstar industrialist... Until earlier this year, when Daimler, one of its biggest clients, cancelled the relationship that had supplied batteries for the German automaker's line of electrical vehicles.

Might not seem directly related to the Powerwall, but the reason behind this cancellation was what injected reality into Musk's well-financed illusion.

This is the part I think you should pay special attention to.

Every giant, no matter how strong, has a crack in its armor... and this giant, Tesla, is no different.

The Powerwall is a Kit, Not a Product

You see, Tesla's batteries lacked a component that all major lithium-ion batteries needed to operate: an effective power control system, or PCS, as it's known in the industry.

This PCS, which acts as the brain of the battery, is what allows power flow to be managed.

Tesla has its PCS produced by a third party, meaning neither its Powerwalls nor its automotive batteries were complete packages.

Sort of like selling a car motor without a transmission, or hooking up a water spigot but not attaching a faucet.

Daimler thought it could do better, both in cost and performance.

It started by saving money and making its own batteries.

When it came to performance, however, it chose a nearly unknown company to provide the essential PCS units for its batteries.

It wasn't the same company that provided Tesla's PCS needs, but rather a tiny tech firm that just happened to manufacture the most efficient systems on the market.

The same company also built its own line of domestic and commercial batteries — products in direct competition with Tesla's own Powerwall, but with some key differences.

Tesla's Biggest Problem Comes in a Small Package

Its batteries are smaller than Tesla's. They're cheaper. They're easier to install. They hold more charge, to the point where a single unit — as opposed to two or more, which is the average for Tesla's products — can service a home.

And, of course, they come complete with a power control system to rival anything else on the market... a PCS that, incidentally, was designed to be compatible with just about every major lithium-ion battery currently on the market.

All from a company that's about 500 times smaller than Tesla and far, far less visible in the headlines.

For now, anyway.

So where is Elon Musk's hype going to take him next?

Well, if I'm sure of two things... the first is that for now, Tesla will sell more and more Powerwalls just as it sells more and more cars.

The second thing is that sooner or later, all the promises made by the Musk hype machine will catch up with him and his company.

And when reality comes home to roost, it will be in the form of small but able competitors.

Companies just like the kind I described earlier, which are causing major brands like Daimler to leave Tesla behind and strike out on their own.

While the investment community may not have turned this into the story of the year just yet, you better believe it will happen sometime soon.

I only learned about it last week, but with critical mass now approaching, I don't think it will be a secret much longer.

Get the details now, ahead of the curve, by clicking here.

Fortune favors the bold,

Alex Koyfman

@AlexKoyfman on Twitter

Coming to us from an already impressive career as an independent trader and private investor, Alex's specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.