Tesla Motors’ $30 Billion Question: Can Model 3 Outdo Big Car Brands?
Tesla Motors ( TSLA ) will unveil its mass-market Model 3 , the grail-quest of its electric car lineup, on Thursday night. When it finally zips off the assembly line, in late 2017 by the most optimistic estimates, the Model 3 will sell for $35,000 before incentives — about half the entry-level price for a luxury Model S sedan or Model X crossover. Tesla has thrived by selling luxury electric vehicles, a field it’s largely had to itself. But can Tesla expand from a niche player to produce great cars at scale cheaply enough, while a slew of mass-market rivals can afford to sell EVs at a loss? Investor bullishness about the Model 3 has helped push up Tesla’s market capitalization above $30 billion, almost six times the California startup’s annual revenue. Is it worth it? Tesla will need to prove it can not only scale up, but also come through on build-quality, where it’s faced some criticism. Taking Stock Of Tesla Motors, With Model 3 Launch A Week Away https://t.co/jOJR5yMaBj $TSLA #Model3 pic.twitter.com/kiSYvoSzvi — Investors.com (@IBDinvestors) March 24, 2016 Other lines of business are expected to help Tesla’s growth, such as the battery gigafactory that it’s building in Nevada. But getting to that $35,000 price on the Model 3 requires finding ways to drive down its battery cost substantially. And more competition is coming from automakers building long-driving-range EVs, such as General Motors ’ ( GM ) Chevrolet Bolt, and from luxury brands amping up their EV output. EV Vs. SUV Trade-off One reason why carmakers like GM, Nissan ( NSANY ) and Fiat Chrysler ( FCAU ) build EVs or plug-in hybrids is to meet increasingly stricter government “corporate average fuel economy” and emissions rules across their sales fleets. But the cars have proven costly to build and hard to sell. Five years ago Fiat Chrysler CEO Sergio Marchionne was quoted saying that “ the economics of EVs simply don’t work ,” with a loss of over $10,000 each applying to one of its electrics. Two years ago he said Tesla was the only company making money on electrics — and that was because of the high sticker price for its Model S sedan. GM and Nissan plowed money into developing the Chevrolet Volt and Leaf, respectively, only to be far-outsold by Tesla. While automakers build the next generation of EVs, hoping that longer driving distances between recharges lifts demand, they have some room to justify selling the vehicles as loss leaders. The more green cars they sell, the more room they have to also sell their high-margin SUVs, pickups and large luxury cars without failing government emissions and fuel-economy targets, incurring fines. “The automakers have to sell ZEVs (zero-emissions vehicles) to get the right to sell larger vehicles with (internal combustion) engines on which they can actually make a profit,” said Jack Nerad, Kelley Blue Book’s executive editorial director, in an email. “This is a balancing act, and that balancing act will get tougher as the years advance and the restrictions grow more onerous.” In principle, selling a $30,000 Chevy Bolt EV would give GM more breathing room to also sell one of its $47,000 Chevrolet Tahoe SUVs (23 MPG, highway). Tesla Motors took in $8 million in revenue in Q4 from selling zero-emission vehicle credits to other automakers whose fleets weren’t green enough. Auto manufacturers “must sell — not just offer to market but actually sell — many more low- and no-emission vehicles than the market appears to have a taste for,” Nerad said. “Thus we are seeing introductions like the Chevy Bolt, which address the ZEV (zero-emissions vehicle) sales problem in a way that is much more palatable to General Motors than buying credits from and thus supporting a growing competitor.” While GM had previously said the Bolt would be profitable, CleanTechnica reported in December, the website quotes former GM executive Bob Lutz (the “father” of the Chevy Volt) as saying that he would be surprised and shocked if the Bolt is a moneymaker. Can Tesla Beat Build Issues? Analysts expect Tesla to sell its Model 3 and other vehicles at an annual pace of 500,000 by the year 2020, up from 50,658 Model S and Model X units in 2015 and Tesla’s anticipated 80,000-90,000 vehicles this year. But ramping up isn’t easy. Tesla CEO Elon Musk has said repeatedly that he has “great respect” for people who manufacture a “large number of complex objects.” Some concerns have arisen over the build-quality of the Model X that Tesla started selling in September. A poster on the Tesla Motors Club forum noted hearing about early problems with some sensors, the driver’s door not closing, paint drips, seat operation issues and the like, for instance, while another noted that “small hiccups” are “just the way it goes.” Then there was the 30-point Model X checklist that a forum participant posted. How significant are the problems? Global Equities Research co-founder Trip Chowdhry told IBD in December that Model X deliveries appeared to be kept especially close to the automaker’s base in California, in a “tight loop” to catch and correct problems early. “This car is completely new, has a lot of new designs, new suppliers and lot of features that have never existed before,” he said — for instance those falcon-wing doors. “Just like with the first release of any product you will have issues and it is expected. The question is how quickly can Tesla respond to issues and incorporate that into future production?” Tesla cars don’t show up yet in J.D. Power’s respected Initial Quality Study or its Vehicle Dependability Study. Consumer Reports loves the performance of Tesla’s Model S, but it issued a critical report on reliability in October, citing the “drivetrain, power equipment, charging equipment, giant iPad-like center console, and body and sunroof squeaks, rattles, and leaks.” Tesla Model 3 Predictions While Tesla’s Model X production started later than expected, Chowdhry expects the Model 3 to be on time. Noting that Tesla now has the Roadster, Model S and Model X production experience under its belt, he says a critical point is that the Model 3 will be built with steel instead of aluminum. “Workers having skills on steel are in abundance vs. aluminum, which requires specialized skills,” Chowdhry wrote in a Monday research note. “Since Model 3 is built using steel, it is highly likely that the production and delivery of Tesla Model 3 will be on schedule” for late 2017. Tesla expects a steeper Model 3 production ramp as a result of lessons learned from its Model S and Model X launches, Stifel analyst James Albertine says. “Management noted the Model 3 sedan will be 20% lighter and less complex to manufacture vs. both the Models S/X,” he said in a research report last month. “Management expects another 30% of improvement from economies of scale and vehicle design, which equates to a 50% price improvement (to $35k base) vs. the Model S ($70k base).” The Model 3 timing concerns Karl Brauer, senior analyst at Kelley Blue Book, “because it’s at least a year after the Chevrolet Bolt arrives, and additional pure electrics with a similar range could easily show up by late 2017. These competitors will have full sales and service support in every state and major market, putting the pressure on Model 3 to keep up in this rapidly expanding market.” Tesla will start taking reservations for its Model 3 on Thursday. First in line #Model3 https://t.co/F2vulJPDg2 pic.twitter.com/E6etKjlZn4 — Tesla Motors (@TeslaMotors) March 29, 2016 “Though this is just a guess, we anticipate reservation figures in the days following the launch (if disclosed) would be in the range of 15,000-20,000,” Stifel analyst Albertine said in a research note in early March. He sees 50,000 to 100,000 worldwide Model 3 reservations in six to eight months after Thursday’s launch. He notes that at $1,000 each, the reservations are “a much lower bar” vs. the $5,000 reservation for the Model S and the Model X “so some attrition is expected.” After a surprise loss in Q4, analysts polled by Thomson Reuters expect Tesla to earn $1.31 a share this year and then $3.34 in 2017, after a $2.30 loss last year. Revenue is seen climbing 62% in 2016 to $8.54 billion, then 27% to $10.83 billion in 2017. Short-seller Citron Research, which expects problems as Tesla tries to scale up production, has targeted Tesla stock. Tesla’s stock has fallen 4% this year, after gaining 8% in 2015, jumped 48% in 2014, and rocketed 344% in 2013. IBD doesn’t rate Tesla highly at moment, but its stock has rocketed 63% from a two-year low of 141.05 set on Feb. 9. Tesla stock rose 1.1% Monday and was about flat in afternoon trading Tuesday, near 230. Image provided by Shutterstock .