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Is Tesla Motors Pushing Cheaper Model S EVs at Model 3’s Expense?

Tesla Inc (TSLA) Store in Southern California

Tesla Motors Inc ‘s mass-market Model 3 will propel EVs to the mainstream and will likely establish Tesla’s dominance in the EV sector of the automobile industry. The Model 3 won’t be available until late 2017 (at the earliest) but General Motors’s rival Chevy Bolt will go on sale in November. Yet, analysts think that the Model 3’s main rival is not the Chevy Bolt; rather, the Model 3 might could market share to cheaper versions of the Model S.

Analysts at Pacific Crest Securities have observed that Elon Musk might be cannibalizing Model 3 sales to sell the cheaper trims of the Model S. If the analysts are right, Tesla might be on the verge of having a demand problem and the fact that rival automakers are getting better at building EVs might further weaken its prospects.

Tesla Motors Inc (TSLA) Model 3

Tesla is offering massive discounts to sell its cars

Brad Erickson of Pacific Crest Securities has published a research note to investors in which he posits that Tesla Motors might have a demand problem in the last few months of 2016 and heading into 2017. Erickson observed that Model S sales has somewhat slowed down and that the “quality of incremental Model S demand gives us pause.”

The more worrisome part is that Tesla seems to be forcing sales by offering discounts and promoting the cheaper versions of the Model S. Erickson observes that the firm “is tracking to the low end of its previously stated delivery target of 80,000-90,000 for 2016, it is using various discounting mechanisms to do so, which is cause for worry.”

In June, Tesla reintroduced a cheaper version of the Model S, the Model S 60 with a sticker price of about $66,000. The Model S 60 originally had a sticker price of $69,900 before the firm discontinued its sales in 2015. Hence, the fact that the firm is now selling the car at $66,000 confirms Erickson’s fears about discounts.  More interesting is the fact that the Model S 60 actually has a 70kWh battery that is software-limited to 60kWh.

Is Tesla killing the Model 3 to sell the Model S?

The Model 3 is set to play a critical role in Tesla Motor ‘s success story. The $35,000 mass-market Model 3 is meant to hasten the transition from gas-powered cars to electric powered cars. However, Ericson observed that Model 3 reservation holders are opting to buy the cheaper Model S now instead of waiting until 2017 for the Model 3.

Erickson notes that, “based on our checks, we think as many as a third of current Model S orders are coming from Model 3 reservation holders opting for the newly created two-year (and less expensive) lease and, of course, the 60 kWh [battery option].”

Nonetheless, the fact remains that Tesla is an industry leader in the EV space and rivals still have a long way to go before they can catch up. The most important thing is for Tesla to sell its cars – that potential Model 3 owners are opting for the Model S is immaterial.

In fact, the fact that Elon Musk could get almost 400K pre-orders for the Model 3 when it was still a concept suggests that the sales of the car will be explosive when it finally hit the roads. Contrary to what analysts at might want us to believe, Tesla won’t have a demand problem  inasmuch as potential EV owners are buying a Tesla and not a Chevy Bolt.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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