The EV Future Just Got Closer

The EV Future Just Got Closer

This afternoon, Tesla announced that the long-promised $35k configuration of the Model 3 is available for order immediately. This is perhaps the most significant event for the US EV market since the announcement of the Model 3 in 2016. The mass adoption of EVs that has become a foregone conclusion would not occur without lower-cost vehicles, and the Model 3 base model sets a new precedent in the industry for quality and price. Shares are down based on the company guiding for a loss in Q1, but that near-term negative is immaterial compared to the long-term positive that was announced this evening.

To emphasize the significance of this announcement, it’s worth pointing out that this is the first time an electric vehicle is less expensive than its gasoline-powered counterparts. Before the tax credit and cost savings, the Model 3 is now cheaper than the Audi A4 ($37,500), the Mercedes C Class ($41,000), and the BMW 3 Series ($40,000).

The timing of the $35k configuration is a few months earlier than most analysts were expecting, which increases our confidence in the company’s ability to exceed 2019 Street expectations of 300k Model 3 deliveries. This compares to company guidance of 300-500k, and is up from 146k in 2018.

March Loss a Near-Term Setback

Shares are down 4% after hours given Musk announced that he does not expect the company to be profitable in Q1. While this is a change from Tesla’s guidance in the Q4 update letter, which said, “our optimistic target is to achieve a very small GAAP net income in Q1,” the magnitude of the loss is unknown, which is why the stock is trading off. Musk cites restructuring costs (acknowledged in the Q4 update letter) and difficulty getting cars to Europe and China (incremental) as reasons for the Q1 loss. While this is a setback, we expect these issue to be corrected by the end of the June quarter.

Online-Only Sales

The biggest surprise was the shift to exclusively online vehicle sales. By removing the sales organization along with most test drive opportunities, the cost of the average vehicle can be reduced by about 6%. While this marks a radical change in how cars are purchased, we believe the value proposition of Model 3 is strong enough that the positives of shifting to online-only will outweigh lost sales from consumers that require a traditional buying experience. Importantly, the company is offering a 7-day or 1,000-mile full refund and return, which we view as a generous test drive approach. In an internal email, Musk shared that 78% of all Model 3 orders were placed online, and 82% of Model 3s were purchased without having taken a test drive.

Autopilot Updates

The company also lowered the price of Autopilot from $5k to $3k and removed some of the advanced features. The more robust version is still available for $5k under the name ‘Full Self Driving.”

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