The first rule of marketing: If you’re going to stop the world in its tracks and tell it to put its entire attention on your announcement, you might want to be absolutely sure that news will be seen in a positive light. Tesla (NASDAQ:TSLA) CEO Elon Musk forgot that rule this past week, up-ending a budding, much-needed rally from Tesla stock in the process.
The news in question, of course, was Tesla’s announcement that it would finally begin selling the long-touted $35,000 version of its Model 3 electric vehicle.
Mission accomplished. Unfortunately, the company has been forced to hatchet off more pieces of itself to make it happen, resulting in a not-entirely-surprising dial-back of this year’s profit outlook.
It Is, In Fact, a $35,000 Model 3
It’s here. Thursday’s big announcement was the unveiling of the often discussed but not yet available $35,000 Model 3.
As far as vehicles go, it’s not exactly a head-turner. It’s got a smaller battery — and therefore less range — than earlier versions of the Model 3, and it doesn’t come with power seats. It’s also only available in black (though to his credit, Musk didn’t borrow the “any color so long as it is black” line from Henry Ford). And, you won’t be able to buy it from an actual person. The company is culling most of its stores, and will send you online to make all future purchases of Tesla’s vehicles.
But it is a $35,000 Model 3.
It just may not be worth it to the company’s investors.
Not Necessarily Worth It
Fans and followers of Tesla stock cheered back on Jan. 30 when, on the heels of a fourth-quarter earnings miss, Musk wrote in his quarterly letter to shareholders “we are expecting to have positive GAAP net income and to generate positive free cash flow (operating cash flow less capex) in every quarter beyond Q1 2019.”
Now, not so much. Musk conceded the current quarter wouldn’t be a profitable one, and was only willing to say profits were “likely” for the second quarter. There’s no clarity beyond that.
Chipping away at profits is a $35,000 Model 3 that probably costs around $35,000 to make and market, given the planned axing of salespeople that add an estimated 6% to the total cost of a Tesla vehicle.
To that end, it’s not even clear a watered-down version of the EV and extreme cost-cutting will be enough. Goldman Sachs commented on the announcement “While we believe the introduction of the $35k Model 3 may be positive for overall program demand … we also think this will drive a downward mix impact for Model 3 margins.”
Goldman’s stance echoed some notes from Bank of America’s analysts, who commented “In our view, the result of what appears to be an earlier push of lower range/price Model 3s will likely be an increase in volume in the near term, rather than an increase in profits, as the cost structure for mass-market electric vehicles (specifically those priced around $35k) is not yet breakeven.”
When asked about it at the event, Musk refused to answer questions about the lower-cost Model 3’s profit margins.
The aggressive move into the low(er) end market may cost Tesla more than money though. Morgan Stanley explained, “We’re concerned it’s a sign of a brand that may be, at the margin, losing its halo of exclusivity.”
Most analysts were struggling to find the net-positive in the news.
Bottom Line for Tesla Stock
It’s a tough pill for diehard fans of TSLA stock — and everything it has done for the EV evolution — to swallow. But, Thursday’s strangely anticlimactic news is yet another layer of evidence that a game-changing idea alone inherently makes for a consistently profitable business. The fact that TSLA stock was lower to the tune of 6% on Friday in the wake of the highly anticipated news says investors are increasingly understanding that reality.
And matters may get worse before they get better, if they get better at all. The new Polestar from Volvo (OTCMKTS:VLVLY) is yet another looming direct competitor to the Model 3 from a longer-established, higher profile manufacturer, pitting one against the other at least partially on price.
And, for the record, while the Model 3 was the best-selling electric vehicle in the U.S. last year, neither the Model X nor the Model S were the second-best sellers. That honor belongs to the Prius Prime, from Toyota Motor (NYSE:TM), underscoring the idea that price and functionality rather than a logo are key drivers at the value end of the EV scale.
It’s a problem, simply because Tesla wasn’t exactly built from the ground up and established as a brand name to fight a price war … a war that will only heat up by 2022, when Ford Motor (NYSE:F) says it will be manufacturing 40 different all-electric and hybrid vehicles.
The last thing Tesla wants is to get into a price war with Ford and its peers. It’s struggling just remain in the black right now with fighting a price war with no one in particular.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.