- Tesla has announced that it will start taking orders for Model 3 in March 2016.
- Tesla will sell the much-awaited EV at just $35k as per the company's earlier plans.
- Model 3 is widely seen as the vehicle that will help Tesla become a mass manufacturer of EVs.
- What does this mean for Tesla and its investors?
After much speculation around the model 3 since its announcement, Tesla (NASDAQ:TSLA) has confirmed that customers will now be able to pre-order a Model 3 for just $35k beginning March 2016, without including federal and state tax incentives. When you throw in tax subsidies, customers might be able to purchase a shiny new Model 3 at the un-Tesla-like price of just $25k.
Tesla stock has been doing poorly ever since JPMorgan lowered its Tesla stock Price Target (PT) saying that checks had revealed that Model X sales were disappointing and this could impact negatively on Tesla’s margins during the fourth quarter. Tesla stock has made a terrible start to the year with shares down close to 40% YTD.
Tesla YTD Share Returns
Nevertheless, the bigger picture here is that this latest move by Tesla is highly significant for the company’s future because it underlines just how committed Tesla is to achieving its ambition to bring the EV to the masses. A cross-section of analysts have been highly skeptical regarding whether Tesla can actually sell an EV at such a low price and still be left with room for profits. One such analyst is Morgan Stanley who recently pointed out that difficulty in production of the new EV could possibly push its price to the $60k range.
The general consensus in the industry is that vehicles need to be priced in the $25K-$35K for them to become successful in the mass market. The base Model S sells for $70k while base Model X goes for $80k. Tesla has been remarkably successful as a high-end seller of EVs, managing to sell as many EVs in 2015 as lower-priced EVs by traditional automakers Ford, General Motors, and Nissan combined.
The Model 3 will most likely be classified as a small luxury vehicle by the EPA as opposed to the large luxury vehicle category to which the Model S belongs. The market for large luxury vehicles in the U.S. is estimated at ~100k units per year whereas the market for small luxury vehicles is about 10 times bigger. By launching the Model 3, Tesla will benefit hugely by having a much bigger addressable market.
It’s possible that Tesla will be able to offer the Model 3 at that price, thanks largely to huge advances that have been made in EV battery technology over the years. When Tesla launched the Model S about six years ago, EV battery costs averaged around $1,000/kWh. The 90D battery that powers the Model S would have cost a staggering 90k back then. Industry experts say that costs have been coming down ~14% every year and by the time Tesla delivers its first Model 3 in 2017, battery costs will probably have dipped below $300/kWh. Many industry experts say that for EVs to truly compete on an even keel with their gasoline-powered counterparts, battery costs will have to drop to $100/kWh-$150/kWh. So it might be another four years or so before Tesla’s EVs can enjoy the kind of mass adoption that we see with traditional autos.
Tesla has in the past said that for the company to become profitable, it will have to sell ~500k vehicles per year. If Tesla is able to grab 25%-30% of the mid-range EV market with Model 3, then the company should be able to sell 250k-300k Model 3 vehicles every year maybe by the second year after its launch. Further declines in battery prices will probably help grow the addressable market and eventually help the company to hit its target of sales of half a million EVs every year. Assuming everything works out according to plan and Tesla launches the Model 3 in 2017, the company could become profitable in the next 3-4 years. You can expect Tesla stock to hit fresh highs once that goal becomes a reality.