This Is What More Powerful Models Mean For Tesla Motors Inc Stock

  • Tesla recently announced upgrades to the Model S and Model X.
  • The new models will be more powerful and feature a longer driving range than the older models.
  • What do these developments imply for Tesla?

About a month ago, Tesla (NSDQ:TSLA) announced that it was going to introduce newer and more powerful versions of the Model S and Model X. The two will feature 100kWh battery packs and deliver improved acceleration with the new Model S P100D, with Ludicrous Mode hitting 0-60 mph in 2.5 seconds while the updated Model X will achieve the same in 2.9 seconds. That's a considerable improvement from the previous 3.2 seconds acceleration time by the Model S P90D and Model X P90D, and makes them the only sub-3.0 sedans in the market today. The more powerful battery pack also improves the driving range for both vehicles to more than 300 miles.

Price check: Model S P100D will list at $134,500 compared to $108,000 for the Model S P90D while Model X P100D will go for $135,500 compared to $115,500 for Model X P90D.

The new offerings could be part of the reason for Tesla's elevated R&D budget during H2.

Also Read: Tesla Motors Inc Has A Serious Cash Problem For Now

Competing with traditional automakers

It's more imperative than ever for Tesla to stay ahead of the curve, especially now that traditional auto makers are beginning to mount a credible challenge on Tesla's dominance in the EV industry.

General Motors (NYSE:GM) has announced that its all-electric Chevy Bolt has performed better than expected in a driving test. According to the company, the 60kWh vehicle made the entire 240 mile trip from Monterrey to Santa Barbara on a single charge, and was left with enough battery power to take it a further 50 miles. That's considerably higher than the company's earlier estimated driving range of 238 miles and better than the 215 miles range Tesla has indicated for the upcoming Model 3. This probably marks the first time that a gasoline vehicle manufacturer has managed to out-innovate Tesla, at least on some aspects. Model 3 still pips Chevy Bolt on acceleration (0-60 mph in 6 seconds vs. 7 seconds for Bolt) and price ($35K vs. $37.5K). Conservative acceleration by the Bolt obviously gives it more room for extra mileage. It's worth noting though that Tesla has not announced an official range for Model 3, and its superior aerodynamics might help increase it to more than 215 miles.

But GM is not the only old-line auto maker that's looking to give Tesla a run for its money. Volkswagen has announced its intention to unveil an EV that's capable of 300 miles driving range off a single 15-minute charge during the upcoming Paris Motor Show to be held from Oct. 1 to Oct. 16. That's pretty fast charging when you consider that a Tesla supercharger needs at least 20 minutes to replenish roughly half the battery while a full charge requires a couple of hours to accomplish.

By developing new vehicles with more powerful and longer-range batteries, Tesla has moved the ball forward for itself and the entire industry. The new Model S P100D is officially the third quickest car in history behind only Porsche 918 Spyder and Ferrari's (NYSE:RACE) La Ferrari. Tesla clearly needs to maintain its position as the most powerful brand in the EV industry, and the latest additions to its lineup helps to cement its lead.

Funding Model 3 development

Since its inception more than a decade ago, Tesla's long-term goal has been clear: build expensive cars, then use the proceeds to fund development of an affordable mass-consumer vehicle. The company's more expensive Model S and Model X trims simply continue this tradition.

The actual financial impact of the new models will be dictated by the sales mix. But judging from Tesla's recent Model S: Model X mix, it appears as if there's a fairly strong demand for the company's higher-end models. Tesla sold 9,745 Model S and 4,625 Model X vehicles during the second quarter, or a roughly 2:1 ratio. The newly unveiled Model S will sell for 24.5% higher than its predecessor while the newer Model X will cost 17.3% more than the older model. The resulting higher ASP is likely to offset a considerable amount of negative mix from the cheaper 60kWh variants.

Higher production volume for Model X is also likely to lead to a better factory utilization and improved margins. During the last quarter, Tesla lowered its Model X margin estimate from -5% to -10% due to constrained production and slower deliveries. But the improved deliveries towards the end of the quarter suggest that the company has been able to overcome at least some of those production constraints.

The bottom line

With more money coming from its luxury brands, Tesla will be in a better position to fund further Model 3 development to hit its 500K production milestone by 2018, and also to defend its lead in the EV industry. The new models are likely to lead to a slight margin improvement for Tesla prior to the launch of Model 3.

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Comments on this article and TSLA stock

A question for this article you wrote: "build expensive cars, then use the proceeds to fund development of an affordable mass-consumer vehicle". The problem is that tesla is already burning amounts of millions of $. How could it be that there will be a positive cash flow in the future? Tesla is burning money with every car they sell (estimates go from 20.000 - 40.000$ per car). How could it be that they make profit? If they sell more cars, the only result is that they burn more money, isn't it?
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