It’s a well-worn factoid: Tesla Motors Inc (NASDAQ:TSLA) shipped just 50,580 units last year. That’s a fraction of the millions that General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) ship. Yet, TSLA stock supports a valuation that is 60% to 70% of its much larger competitors.
Given this large disconnect between TSLA valuation and operating performance, though, it is only fair that every move by Tesla be criticized to the fullest extent. After all, investors are betting on mass production and that Tesla Motors will one day be just as large if not bigger than the likes of General Motors and Ford.
Still … while Elon Musk and Tesla are well deserving of whatever criticism they receive, TSLA stock investors must keep the ultimate goal in mind when considering the reason behind recent news.
Why Offer a Lower-Priced Model X?
There is some panic among TSLA stock owners following recent news that Tesla is adding a lower-priced version of its Model X crossover. Tesla has an affordably priced vehicle with its Model 3, but the Model X and Model S are positioned as high-end vehicles.
The fact that Tesla is now offering a Model X model starting $9,000 less than the original, at $74,000, has some investors worried that demand is falling.
However, that is not necessarily true. If Tesla is going to grow annual shipments from 50,000 to 1 million by 2020 (which is Musk’s goal), then it must have different price points for its vehicles so it appeals to a larger audience. Fact is that many consumers can not afford a car that starts at $83,000, and while $74,000 is still expensive … well, it’s more affordable than $83,000.
Furthermore, Tesla is doing what many manufacturers do in offering fewer incentives and add-ons for the lower priced model.
For instance, Ford has the F150, F250 and F350, and then there is regular cab, super cab, and SuperCrew Cab, along with specification differences. The cheaper Model X has less torque and a shorter driving range. This tactic should make Tesla vehicles more appealing to a larger audience.
Tesla Quickly Moving Toward Mass Production
In other news, Tesla is discontinuing the resale value guarantee program that promised early Tesla owners upwards of 50% of their base price after three years. Tesla is reportedly doing so to keep interest rates as low as possible and so it can offer the best loan and lease options to customers.
Much like the news of Tesla offering a lower-priced Model X, I think this is yet one more necessary step in going from niche manufacturer to mainstream, volume manufacturer. In retrospect, we don’t see GM or Ford offering resale value guarantee programs, and that’s because its goal is to keep consumers buying new vehicles in high volume, not reselling used vehicles.
Bottom Line on TSLA Stock
While I do not recommend TSLA stock as a buy, I do like the collective moves that Tesla is making to keep its promises to shareholders. The company has spent billions of dollars on manufacturing and to complete its Gigafactory, which will allow it to produce vehicles and keep up with demand.
These latest moves coupled with the fact that Tesla is ready to embrace third-party help to market TSLA vehicles and potentially charge vehicles bode well for its long-term outlook. Granted, I doubt Tesla will ship 1 million units by 2020 (Tesla is at this point notorious for missing production markets), nor do I believe that TSLA stock will outperform the market over the next three years due to its valuation.
However, there is no question that Musk & Co. are building top-of-the-line vehicles that resonate with consumers, and that they have a plan to compete with the big boys.
Therefore, if TSLA stock were to fall back like Netflix, Inc. (NASDAQ:NFLX) did in 2011, it would most certainly be a buy.
It’s just not attractive at these levels.
As of this writing, Brian Nichols was long GM.
