At the end of June, Tesla (NASDAQ:TSLA) hit a major milestone. While the TSLA stock price didn’t reflect it, producing 5,000 Tesla Model 3 vehicles in a week was a big accomplishment for the company. But is the new sedan for the masses yet? It’s getting there.
For what feels like the first time in ages, the young automaker was able to meet its production targets. CEO Elon Musk has championed the Tesla Model 3 as a car for the masses. Had production started off stronger, perhaps it would be by now. In order for the Model 3 to be for the masses, it needs to be affordable. Currently though, that’s not the case.
Tesla Model 3 Price Goal
I want to first say that TSLA’s current strategy makes total sense from a business perspective. In essence, the company put out reservations to Model 3 customers for a $1,000 refundable down payment, then it began producing the most expensive versions first. This includes only producing the long-range battery version at this time. It also includes producing a high-performance model as well as offering an all-wheel drive version.
In its latest update, it said there are still about 420,000 reservations in the queue — a good sign for investors. Even at the 5,000-a-week mark, it will take the automaker more than 84 weeks or about 20 months to get through all the orders. And that’s assuming no one else places an order.
Given the company’s goal to be cash-flow positive and GAAP profitable in the third- and fourth-quarters, and to not raise capital in 2018, it needs to sell the products that generate the most revenue. Tesla recently cut its wait times for the Model 3 and just this week, it dropped its reservation system, allowing customers to go straight to its site and order the new sedan.
However, here customers will find that the lowest price for a Tesla Model 3 is $49,000. That’s a far cry from the $35,000 price tag many are still anticipating. The short-range battery still isn’t produced and Musk says he hopes for it to be in production by early 2019. The $49,000 unit also includes no extras, is rear-wheel drive and doesn’t have Autopilot or full self-driving capability.
For those wondering, customers can currently push the Tesla Model 3 all the way up to $77,000. That’s actually more expensive than the 75 kWh all-wheel drive Model S.
Getting the Tesla Model 3 to the Masses
Of note, federal tax credits can aid in the cost of the vehicle. Some states have credits, while federal credits for the Model 3 are up to $7,500 (bringing it down to about $42,500). However, this only applies to the first 200,000 vehicles sold in the U.S. After that, the credit starts to fade. Currently, the sedan is about 20% of the way through that credit.
So while some buyers are theoretically subtracting that from the upfront costs, that may not apply to those buyers who are taking delivery a ways down the road. Admittedly, the Model 3 has a long way to go before it hits that point, but it should be mentioned.
Getting the Tesla Model 3 to the masses will require Tesla to create the short-range battery needed to drop the price tag significantly. In order to do that, Tesla will need to maximize production efficiency and improve its automotive gross margins.
It doesn’t do much good if the company can’t produce the vehicle at a profit. And given that it now plans to open up a new Gigafactory in China (to produce both cars and batteries) and TSLA will begin spending significant CapEx on the Model Y in 2019, it will need all the capital it can get its hands on.
So is the Model 3 for the masses yet? Not quite.
But Tesla is getting there. While it will be a few years before TSLA is producing cars in China, that market too will help expand the Model 3’s reach.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
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