Will Tesla Have To Rein In Its Mass Market Ambitions?
Tesla Concentrates On High-End Model 3s To Boost Profits.
“The problem is investors have given Tesla a near $50 billion market cap in the belief the company will upend the global auto industry, not become a niche, high-end electric car maker”.
The debate about Tesla’s future has progressed from will it become the first mass maker of electric cars or go bust, to a third option – will it end up being a niche but profitable maker of electric cars for the rich.
The idea that the Model 3, now slowly emerging from early production chaos, would be a mass market performer was always a bit of a stretch given its notional base price before tax of $35,000. But it now seems that the price point, at least for early models, is more than twice that, and the volume-possible goals have taken a big hit.
“Tesla has given its first signals that it is giving up on its ambition to become a mass-market car maker. Prospective customers should be angry, and investors ought to be wary,” said Wall Street Journal Heard on the Street columnist Charley Grant.
Grant was commenting after news first versions of the model 3 would be upmarket $78,000 versions, and Tesla CEO Elon Musk saying in the company’s current state, selling $35,000 Model 3s “would cause it to lose money and die.”
“The problem is investors have given Tesla a near $50 billion market cap in the belief the company will upend the global auto industry, not become a niche, high-end electric car maker. What that latter company is worth is hard to say, but it is not the current market valuation,” Grant said.
Some analysts though see the focus on maximising profit from the Model 3 as a mature and welcome move for shareholders.
“Tesla announcements show it to be refocusing at least temporarily on reducing losses by prioritizing niche auto segments – like an $83,000 Performance Model 3 – and bringing costs and spend somewhat in line. If Tesla took our advice it would take its focus a step further; continue to ramp up Model 3, but pull back on automation; install a COO (chief operating officer); don’t start Model Y until Model 3 is well on track; push more mechanical hardware out to Tier One suppliers to allow internal resources to focus on software,” Barclays Equity Research analyst Brian Johnson said.
Johnson points out that the market for a $27,500 car is 3 million a year in the U.S., but only 375,000 for $60,000 ones, and 50,000 for cars priced at $80,000.
Another recent negative for Tesla was a “Consumer Reports” article saying the Model 3 brakes weren’t up to scratch and Nord LB from Hanover, Germany, said this could put off some buyers. Tesla shares were an “extreme bet” on the future.
“We also expect the production target of the Model 3 for the end of June of 5,000 per week to be missed. In addition, the group has yet to prove it can actually earn money with the Model 3. In view of the accumulation of negative news flows, we have reduced our earnings estimates and subsequently lowered the price target for Tesla shares to $220. The investment judgement we leave at “sell”,” Nord LB analyst Frank Schwope said.
Towards the end of May the Tesla share price was close to $275.
There are still some strong Tesla advocates though.
Berenberg Bank of Hamburg, Germany thinks Tesla is doing well cutting costs from the Model 3, which it estimates at $28,500 compared with the Model S. Berenberg’s target share price for Tesla is $500.
“The labour content per vehicle on a Model S is above $4,000 – more than double that of the industry benchmark. But on a Model 3 this figure will likely fall to about $1,000 per car, helped by higher levels of automation and lower in-sourced content. We think reports that Tesla is reversing its automated manufacturing strategy over-exaggerated the real changes to the production system,” said Berenberg analyst Alexander Haissl.
Capital spending per car is also down from about $5,500 for the Model S to about $1,900, already in line with industry benchmarks, and before the planned outcome of 10,000 Model 3s a week. Berenberg thinks with full production another $400 can be shaved. Better material use has slashed about $17,000 in costs compared with the Model S.
Morgan Stanley thinks Tesla’s stock is currently fairly valued, but suggests for long term success it may need a big brother.
“We believe the company may need to seek strategic partnerships to be successful long term,” said Morgan Stanley analyst Adam Jonas.
Not nearly deliverable
Tesla has said in the past it will build 1 million models a year by 2020, but last year Morgan Stanley said this was not even nearly obtainable and forecasted Tesla will reach 500,000 Model 3 deliveries a year no earlier than 2024.
In 2017, Tesla delivered 101,312 Model S and X vehicles.
Heard on the Street’s Grant, a long-term Tesla doubter doesn’t see much hope.
“If Tesla gives up on the mass-market, the company will produce a lot fewer cars than investors expect and its valuation should be questioned. Tesla’s market value is about $450,000 per car sold last year. That is more than 16 times the value assigned to peers like BMW,” Grant said.
This might also prompt those who have put deposits on Model 3s to demand their money back.
“Giving up on the mass market may be the right decision for Tesla, but not for shareholders,” Grant said.