A Critical Moment for Tesla
The carmaker is closing all stores to sell the $35,000 Model 3.
Tesla (TSLA) announced Feb. 28 that the long awaited $35,000 before tax credits Model 3 is now available, with deliveries starting in 2-4 weeks. At that price point, much like early Fords, the car is only available in black. More interesting is that to make this car in a financially responsible way, Tesla is closing its stores and moving to global online only sales. Tesla expects this move to enable an average price cut of 6% across its lineup. Customers can return a car after a week or 1,000 miles. CEO Elon Musk in a press conference also said he does not expect a profitable first quarter but second quarter profit is likely. We are not changing our fair value estimate because we've long modeled increases in vehicle sales as Tesla expands its product lineup.
Model 3 reservations started nearly three years ago, so we find the online sales news more interesting. Tesla has long fought a battle with state dealer associations and the National Automobile Dealers Association about selling vehicles direct. Some states, such as Texas, have very strict laws that Tesla has not succeeded in changing, so in those areas it has galleries where consumers can get information but not buy a vehicle. The vehicle is technically bought from a Tesla store in another state and we imagine this same method will apply in the online model for states like Texas. Tesla will keep galleries open in high volume areas globally but sales are now online.
We like the idea of easing the buying process, but we expect legal challenges from the likes of NADA. The other key challenge is will consumers who are comparison shopping Tesla with other brands be willing to buy sight unseen as opposed to going to say a BMW dealer for a free test drive and then buying the BMW. Ultimately Tesla needs to appeal to the mass market, not just its loyal fans, and it's possible consumers in large volumes won't be willing to take the purchase risk even with the generous refund policy. Time will tell.
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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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