- Tesla‘s long-awaited $US35,000 Model 3 was announced Thursday evening.
- CEO Elon Musk said the company will close many of its retail stores to help lower the cost of the Model 3.
- Musk doesn’t expect Tesla to be profitable in the first quarter, but believes profitability should return in Q2.
- Wall Street analysts were mixed on the announcement.
- Watch Tesla trade live.
Musk also said Tesla would close “many” of the its 378 retail stores, allowing the electric-car maker to lower the price of the sedan.
“Shifting all sales online, combined with other ongoing cost efficiencies, will enable us to lower all vehicle prices by about 6% on average, allowing us to achieve the $US35,000 Model 3 price point earlier than we expected,” the company said in a blog post.
But that wasn’t all, the announcement was accompanied by Musk warning he doesn’t “expect to be profitable in Q1 but profitability in Q2 is likely.” That was a change of tone from his January conference call, when he said he was “optimistic about being profitable in Q1 and all quarters going forward.”
The reception on Wall Street, at least among investors, was a bit chilly, with shares trading lower by more than 4% Friday morning. But analysts were mixed, with some seeing the glass half empty and others seeing it as half full.
Check out what Wall Street analysts are saying about Thursday evening’s announcement:
Goldman Sachs: $US35k Model 3 implies lower demand for higher priced variants; potential margin compression with program mix shift
Price Target: $US210
“While we believe the introduction of the $US35k 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.” analyst David Tamberrino said.
JMP: Tesla Drops Prices, and Its Dealership Network Too
Rating: Market Outperform
“Tesla has come up with a novel approach to hitting its long-anticipated $US35,000 price point for its Model 3, which consists of largely shutting down its sales network,” JMP analyst Joseph Osaha said.
“That, combined with offering a variant of the Model 3 that appears to be quite stripped down, moves the inexpensive Model 3 solidly into the mass-market segment of the auto business.”
Osaha says the $US35,000 sedan stacks up “quite nicely” against the competition, but that switching to an online sales model will lead to the automaker “surrendering some of its customers.”
Wedbush: Drumroll….$US35k Vehicle Unveiled-Potential Game Changer for Musk & Co.
Price target: $US390
“This news is coming much earlier than expected and earlier than our expectations of the July/August range; in our opinion the company would not be rolling out this much anticipated version of Model 3 unless it could be done with GM that approach company targets, a key focus of the Street,” analyst Dan Ives said.
He added: “In our opinion this announcement is a potential game changer for Musk and Tesla as the $US35k vehicle at profitable margins is a linchpin to the bull thesis in the name and we view this news as a major step forward. While there are still questions that need to be answered around logistics and delivery, combined with the margin profile on this model, we believe this strategic shift was the right move at the right time for Tesla, although the stock will be a ‘prove me’ name for the next 6-9 months.”
Berenberg: Moving down the cost curve
Price target: $US500
“We maintain our bullish view on Tesla, as the announced changes and earlier-than-expected arrival of the $US35,000 Model 3 demonstrate its determination to drive down costs for its vehicles,” analyst Alexander Haissl said.
“The debate that the measures are a result of weakening demand are exaggerated and taken out of proportion, as we think the market underestimates the total addressable market for the Model 3 once all levers have been pulled.”
Morgan Stanley: Cutting Price, Closing Stores, Moving the Metal
Price target: $US283
“While this may stabilise 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,” analyst Adam Jonas said. “We think the bears have more material to work with than bulls here.”
Additionally, he believes getting rid of retail stores could “trigger a large amount of discussion with state and national regulatory bodies” and lead to “a number of legal challenges.”
Jonas also thinks raising the required downpayment from $US1,000 to $US2,500 could act as a “pseudo-capital raise.”
Macquarie: What the $US35K Model 3 Means
Price target: $US430
“We maintain our view that Europe & China demand should drive sales (once logistics issues are addressed) but now also expect the $US35k Model 3 ($US31,250 with US federal subsidy) to drive unit demand in the US,” analyst Maynard Um said.
“While we expect this to come at a lower gross margin, lower store opex should offset if the company gets enough scale. We think it’s important to note what a big milestone a $US35k Model 3 is, now coming in below the base price for ICE models like the BMW 3-series & Audi A4.”
JPMorgan: $US35K Model 3 Debuts Alongside 2nd Sweeping Restructuring (Store Closures); More S & X Price Cuts Hint at Softer Demand
Price Target: $US230
“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,” analyst Ryan Brinkman said.
“And why would Tesla today be able to generate substantially above industry average gross margin on mass-market models, given it lacks the purchasing power and the ability to amortize fixed development costs across as many units as its much larger global automaker peers, and given the added cost of electric propulsion?”
Business Insider Emails & Alerts
Site highlights each day to your inbox.