Tesla Motors Inc (NASDAQ:TSLA) is gearing up for production of the Model X EV SUV, and fans of EVs, along with those holding shares, are looking forward to seeing the final version of the car and the sales it brings to the firm. If the Model X sells well, however, it might drive up the price of the firm’s next big release, the Model 3.
Government support is a key part of the Tesla story, whether you agree with the firm’s grants or not. That’s how Tesla Motors is able to sell a 2015 Model S for less than $50k, and those lower prices are a clear driver of sales. With the biggest grant, a $7,500 federal income tax break on new EVs, soon to be over, Elon Musk and crew may be in a spot of bother on the release of the Model 3.
Tesla Motors to lose income tax breaks
The $7,500 income tax break is only applicable to the first 200,000 units sold by any one firm. Tesla Motors is still a long way off hitting that number, but if the Model X sells as well as Elon Musk seems to think, it may hit the figure before the release of the Model 3, or soon after it begins to leave Fremont.
Alan Baum, an analyst who has been following the Tesla Motors story closely, says that the firm sold 49,720 cars in the US through June 2015. Tesla’s own numbers show that it sold 21,500 cars in the US so far this year and the firm forecasts sales of 33,500 more, including both the Model X and Model S, before the end of the year.
Mr. Baum said “A potential problem for Tesla is that they may eventually reach the current ceiling for federal rebates, which is capped at 200,000 units per company.” That’s not just potential, it’s a real problem and it’s going to hit the firm before the Model 3 hits the road.
Tesla has not forecast sales for 2016 just yet, but the firm says that it will sell 500,000 cars before the end of 2020. Elon Musk says that the market for the Model X will be much bigger than that for the Model S. Tesla may update that forecast when it releases earnings for the three months through June at the end of July.
With close to 85,000 sales from Tesla Motors before the end of the year, the firm will hit close to the 200k unit cap on the federal income tax support by the end of 2017 even if it doesn’t grow sales at all in the next two years. The Model X is expected to be a big seller, however, and that means that Tesla, if all goes to Mr. Musk’s plan, will hit the 200,000 cap long before then.
Chuck Jones at Forbes reckons that Tesla Motors will sell 100,000 cars in 2016 including the Model X and Model S. If he’s right Tesla Motors will hit the cap on the grant long before the Model 3 goes on sale, driving up the price that buyers will have to pay for the car, and every other car sold by Tesla.
Looking for more government support
Elon Musk has promised that the Model 3 will cost $35,000 at launch and estimates going around since then, including those from at Jalopnik, have promised a real price tag of $27,500 based on the income tax credit. It’s clear from the number above that the tax credit won’t be there in 2017 unless the Model X is a huge flop, Model S sales don’t expand at all in the coming years, or the structure of the grant changes.
The Model 3, unlike the Model S and Model X, will have to stand on its own two feet at Tesla Motors and sell without the benefit of income tax support from the state. There may be a ray of light for Model 3 pricing in a reform of the EV income tax credit, but Congress’ gridlock is making that less likely.
A proposal for a reform of the EV tax credit, which the Obama White House sought to include in the 2015 Budget, would have removed the credit for high-priced cars, but boosted it for those with lower price tags. The cut-off point was set to be $45,000 meaning that the Model X and Model S would be excluded from the price cut.
The Model 3 could have, however, benefited from a $10,000 rebate for buyers. The proposal also looked to remove the 200,000 unit cap on EV sales that limits Tesla’s current outlook. The 2015 budget was never agreed between the Obama administration and Congress, so the law has not come into existence just yet.
Balancing sales of the Model X
Tesla Motors still relied on the income tax grant in order to drive demand for its cars, but the firm won’t be able to rely on the US Congress to help that support on its side. That’s the problem for any firm that relies on one major actor to secure its business for it.
The Model X will, for the next eighteen months at least, be able to use the current EV grant to lower its sticker price. Tesla is unlikely to try to restrain sales of the SUV EV in order to lower the future price of the Model 3. That would harm the company much more than it could help it.
The Model X needs to have a great launch in order to keep the market behind Tesla. Execution risk is one of the biggest problems it faces, and some on Wall Street are turning against the firm based on the risk/reward of holding shares right now.
Risks rise for Tesla Motors
In an update to its view on Tesla Motors published on Tuesday morning Deutsche Bank said that its clients should Hold the stock. Rod Lache, who wrote the report for the Germany-based investment bank, said that the risks at the firm were too great, and the price of shares too high, to advise traders to Buy stock in the firm.
His $280 price target forecasts “that TSLA approaches 500k vehicle sales per year and achieves a 15% operating margin on those sales.” That’s the base case for Tesla going ahead by Elon Musk’s book, but Mr. Lache doesn’t think that the stock price should go up beyond this level given that outlook.
Shares in Tesla Motors reacted badly to that report on Tuesday. At time of writing, just after midday on the east coast shares had lost more than 5 percent of their value, though they were creeping back from heavier losses seen earlier in the day.
Those with shares in Tesla are being careful with the value of shares in the firm after massive spikes and drops in the past erased large amounts of value, often precipitated by a comment on the share price from CEO Elon Musk.
With the Model 3 not likely to reap the income tax credit proposed by the Obama White House for this year, it seems that the car is going to be sold for $35,000 rather than $27,500.
It’s still not clear whether that number will include the gas savings that Tesla Motors uses to drop the price of the Model S as it appears on its website. The firm uses a base $10,000 saving in order to calculate the cost of a new car. That could mean the sticker price will actually be $45,000 but well have to wait until 2017 in order to find out.
Update 12:18 EST: Added pars on the effect of Deutsche Bank report on Tesla Motors Inc shares on Tuesday.
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