After Tesla (NASDAQ:TSLA) announced its mid-sized crossover SUV, the Model Y, the stock didn’t respond the way bulls would have liked. Maybe the upside potential of strong sales for the Model Y was already priced into TSLA stock… or maybe the market’s simply tired of Tesla’s promises.
Negative news may have knocked investor confidence in the electric car maker. So, as Tesla shares tread just 10% above 52-week lows, should investors buy the stock now?
Just like with Model 3, Tesla’s Model Y has impressive specs that include a 300-mile range, an AWD model, and room for up to seven passengers. The SUV will get from zero to 100 mph in just 3.5 seconds. Unfortunately, the solid performance numbers and capabilities are already available in the entry-level Model 3. Except for the extra seats, which is a strong selling point, Tesla’s entry in the popular crossover SUV market will have mixed benefits.
Crossover SUVs are already the most-popular class in gas-powered vehicles. Model Y is priced at levels that puts it out of reach for consumers who could buy a model made by Toyota, GM, or Honda. German car makers Mercedes-Benz, BMW, and Audi may eventually offer electric-powered crossovers, albeit likely at higher prices.
Just as Tesla took more than a year to get the Model 3 into production and in the hands of consumers, Model Y will take some time. Meanwhile, those German gas-fueled models at similar prices to the Model Y are available today.
The long-range version of Model Y won’t be available until Fall 2020 and will start at $47,000. The more-affordable standard range model will be available in Spring 2021 and starts at $39,000.
Model Y will clearly face negative pricing pressure from the current expensive models. The company is finding a cheaper way to manufacture the Model X. If it fails to cut costs low enough to spur demand, the company’s losses could mount. Although sales are still growing, the higher costs will put pressure on cash flow and Tesla’s ability to finance debt.
Worrying Balance Sheet
Per data from Simply Wall St, Tesla’s debt is mounting. Fortunately, cash levels and net worth are holding steady but are at risk of falling. Tesla will need to find a way to bring Model Y production online without adding more to capital expenditures.
Soaring revenue since 2017 is a positive development. The company still loses money on every car it sells but that loss is shrinking. Its staff cuts, controlled operating expenses, and the closing of a few stores will help lower overall costs. The bad news is that Tesla had to backtrack on closing all physical stores.
Below: Revenue grows sharply but Tesla is still losing money.
Online-Only Model Could Work
Tesla’s idea of closing all stores has merits. Through word of mouth and from satisfied customers, Tesla already has incredibly strong branding strength. It could do without the retail rental costs and showroom staff to drive sales. Plus, Tesla could have passed the savings to customers to boost volume. The reality, however, was unexpected: owners protested over the drastic price cuts and brought more negative news to the company. For now, putting the store closures on pause will give Tesla some time to rethink its online and retail sales strategy.
It has another full year for planning and executing the rollout of Model Y. With the need for re-accelerating sales, Tesla cannot afford to miss on ramping up production to meet the expected strong demand next year.
TSLA Stock Valuation and Your Takeaway
Tesla stock is trading 16% below Wall Street’s consensus price target of about $313. The company’s heavy debt and ongoing losses were never an issue for shareholders before. This time around, investors are treating the Model Y release as a “show me” story first before they bid TSLA stock higher.
Having gone through a Model S, X, and the Model 3 release through the years, Tesla may finally be better prepared for turning Model Y into an electric crossover that finally brings the company into the mainstream of automotive.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.