After the market closed on Thursday, February 28,
Tesla’s
Elon Musk announced that the company would be selling a $35,000 Standard Range version of the
Model 3, closing almost all of its stores and having all cars ordered online. While Musk had been touting a $35,000 Model 3 for a few years, moving to all online sales is either a brilliant move or a Hail Mary, since it is a major shift on how a car company sells and how people buy them. It may turn out that Tesla will be even more disruptive to the auto industry and pull this off, or it could be an indication that this is a desperate move to become profitable on a sustained basis.
Since the company has to drastically decrease the number of its stores and employees to cut enough costs, it appears this may be a desperate attempt to increase sales. Especially since it was just over a month ago when Musk said that the $35,000 Model 3 wouldn’t be available until the middle of the year. Investors initial reaction was quite negative as the stock dropped by $24.55 or 7.7% to $295.33 losing about $4.4 billion in market cap.
Tesla also announced that it would have a loss in the March quarter vs. its prior guidance of a “very small GAAP net income” and that the June quarter is “likely” to be profitable. Lowering the company’s profitability guidance isn’t surprising given the reports of European Model 3 delivery delays and weaker Model 3 demand in the U.S. post the halving of the Federal Tax Credit from $7,500 to $3,750 on January 1. It also appears that Model S and X demand has weakened, even though it has cut prices for these two models by approximately 6% per Bernstein’s Toni Sacconaghi.
Keep in mind this follows Tesla announcing just over a month ago that it will be laying off about 7% of its workforce and the CFO announcing his departure in the earnings conference call at almost the same time.
There are now 6 versions of the Model 3 from $35,000 to $58,000The $35,000 Standard Range Model 3 will have a 220-mile range with a top speed of 130 mph, 0 to 60 mph acceleration in 5.6 seconds, and will also only be available with a black interior.
A $37,000 model will have a 240-mile range with a top speed of 140 mph and 0 to 60 mph acceleration in 5.3 seconds. For 6% more in price, the Standard Range Plus provides 9% more range, more power and an upgraded interior.
There will now be a total of 6 Model 3 versions with the highest price one being the Performance Edition at $58,000. Bernstein’s Sacconaghi estimates that the Model 3 product line has had a price drop of about $6,000 for all the versions since the December quarter, which is not an indication of strong demand and is a hit to margins.
7 days or 1,000-mile test driveTo offset the stores closing, Tesla will offer a very generous 7 day or 1,000-mile test drive window for a full refund. This should allow cars to be bought in every state as the company believes dealership laws in some states that have excluded Tesla won’t apply.
The company is betting on customers willing to forgo the typical test drive and become comfortable recharging within a week to pull the trigger. Even though a very high percentage of Tesla buyers have been purchasing them without a test drive, this may not be the case in the future as sales to early adopters and Tesla fans are fulfilled.
Tesla will have to significantly increase its services capabilities since it won’t have stores and have to cover all 50 states and the service will be provided at the car’s location, not a Tesla site. Fortunately, an
electric car is much easier to service than an internal combustion engine car.
What about solar system sales?One other key question is how will Tesla’s solar systems be sold. The company has pulled back on various channels since it acquired Solar City, so by not having stores either new or previous channels will have to be ramped or sales will take a hit.
