Despite a number of headwinds for Tesla Inc (NASDAQ:TSLA), TSLA stock continues to outperform traditional automakers. Weak monthly (March) auto sales for companies like General Motors Company (NYSE:GM) are scaring away value investors. Conversely, markets did not react to Tesla’s recall for around 53,000 vehicles and the price cut on the Model S.
On April 20, Tesla issued a voluntary recall due to a brake issue. The problem could prevent the parking brake from releasing.
The company does not believe this will lead to any safety concerns for customers. Markets are not reacting to the news because the recall affects only a small percentage of cars on the market. Since a gear built by a third-party is responsible, Tesla will incur no significant costs.
Price Cuts
Tesla’s decision to cut prices on the Model S by almost $8,000, along with including the all-glass roof as standard, may incentivize potential customers to buy Tesla. The price reduction will also narrow the gap between that and the upcoming Model 3, which costs nearly half the price.
The company is also making room for a higher-priced model. The company may have decided to lower prices, to make room for the P100D. Still, investors should look for confirmation that the price differentiation between the Model S and P100D is big enough that overall sales go up.
Tesla Model 3: Three Months Away
At a $35,000 base price, the Tesla Model 3 will target the mainstream market. Its release three months from now will also put the company in more direct competition with BMW (OTCMKTS:BMWYY) and Mercedes-Benz . Though the pricing for the Model 3 is comparable to that of BMW’s 3 series and the C-Class from Mercedes-Benz, similarities end from there.
Tesla’s car is all-electric, while the premium brands still rely on gas for the energy source. Strong initial sales for Tesla’s less expensive EV will give the company a vote of confidence.
In the all-electric market segment, Tesla held 30% of the market in 2016. It will very likely grow share with the Tesla 3’s release.
Tesla Enters Truck Market
On a bullish note, CEO Elon Musk’s tweeted that hints Tesla will manufacture trucks. Building trucks with bigger batteries to support longer driving ranges will be the company’s biggest engineering feat. Should the truck have limited range, drivers will only handle only local deliveries.
Tesla may have further improved battery technology, increase aerodynamic efficiencies and minimized its R&D costs in designing the truck. As an early mover for EVs in this market, the company has a good chance of winning market share. This will translate to higher revenue growth and a justification in the high valuations of TSLA stock.
Tesla’s quarterly results will shed some light on how much the company expects it will spend on capex and R&D. Entering the truck market will hurt cash flow this year. But Tesla needs to widen its addressable market beyond cars by making trucks.
TSLA stock is in the early phase of two major product releases: the Model 3 car and a new truck. The company will strengthen its leadership in the EV market by growing its market share.
