Analysts were unimpressed after Tesla CEO Elon Musk announced a cheaper Model 3 on Thursday afternoon.
Shares of the company were down more than 3 percent in pre-market trading to $319.88. Investors also reacted to Musk’s comments that it wouldn’t be profitable in the first quarter.
Barclays analyst Brian Johnson probably had the coldest reaction, calling it the “un-iPhone moment.”
Morgan Stanley analyst Adam Jonas also seemed skeptical, noting, “While this may stabilize the air-pocket in Q1 sales, we’re concerned it’s a sign of a brand that may be, at the margin, losing its halo of exclusivity.”
“We think the bears have more material to work with than bulls here,” Jonas added.
Here’s what the analysts had to say:
” Another few ‘blue pill’ bull case points undermined… As we have long argued, the bull case for Tesla often revolves around it being the next Apple, with the Model 3 as the iPhone…But today’s announcement of a lower priced $35k Model and closing all stores/galleries undercuts a few of those pillars…”
“Tesla significantly increased its efforts to promote the sale of cheaper cars… While this may stabilize the air-pocket in Q1 sales, we’re concerned it’s a sign of a brand that may be, at the margin, losing its halo of exclusivity. We think the bears have more material to work with than bulls here…”
“Ultimately, we think this announcement may have been anticlimactic for investors, with the timeline for the launch only accelerated a couple months and as we believe investors were looking for details on new products (Model Y or Pickup truck) and a potential update on Model 3 demand (remaining reservations, weekly order rates, initial international demand levels)… While we believe the introduction of the $35k Model 3 may be positive for overall program demand — which we and investors have been questioning given the phase out of the EV tax credit in the US and price elasticity of demand for the higher priced vehicle variants — we also think this will drive a downward mix impact for Model 3 margins…”
“Given its seeming abruptness, it does not appear that yesterday’s announcement was made from a position of strength…We believe that a $35k Model 3 has close to ~0% gross margins today, suggesting that these price cuts could materially dilute Model 3 and company gross margins initially – we estimate up to 600+ bps and 400 bps respectively. We *guess-timate that cost savings from reducing Tesla’s sales offices might amount to $500M per year; similarly, a 500 bps hit to GMs from lower prices would point to $850 million of lost gross profit dollars… Accordingly, if Tesla does continue to improve its manufacturing costs – which it strongly believes it can do – operating margins over time could very well improve from last quarter’s levels, even before further expected op ex leverage… The move to direct sales is bold, though we are comforted that 70%+ of Tesla buyers in 2018 did *not* test drive prior to purchase… That said, we do believe that salespeople have been important in upselling Tesla customers, as well as selling Tesla solar products. Tesla’s actions appear to be further acknowledgement that Model S and X sales remain challenged, and that the European roll-out has been more difficult than expected…”
“We would note that TSLA previously indicated that it expected to deliver midrange/ price Model 3s across major markets likely around May of this year, progressing towards lower-range/price models around mid-year… 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, as outlined in our Who Makes the Car analysis… And while TSLA noted that these new models will be lower in cost, it appears this may be more a function of reduced battery size and range, rather than any other major cost efficiencies…”
“The centerpiece of the announcement revolved around the long-awaited debut of the shorter range base version of the Model 3 sedan starting at the long-promised price of $35,000 — a seemingly positive development… However, in a posting to the company’s blog and in an email to employees made publicly available, Tesla CEO Elon Musk explained that in order for the company to be able to both offer the car at this low a price and to remain financially sustainable, it has become necessary to close most of the company’s well over one hundred stores, which we estimate could result in another round of potentially thousands of lay-offs (it dismissed 7% of its full-time staff just last month), along with restructuring charges and severance pay… We do not think this was the original plan envisaged by Tesla management and bullish investors, but rather is instead suggestive of what we have long feared — that the Model 3 would prove more difficult and more expensive to manufacture than was originally projected, such that the firm would struggle to earn its targeted above industry average 25% gross margin as it transitions toward industry average pricing…”
