Morningstar

A Critical Moment for Tesla

The carmaker is closing all stores to sell the $35,000 Model 3.

Securities In This Article
Tesla Inc
(TSLA)

Tesla TSLA announced Feb. 28 that the long awaited $35,000 before tax credits Model 3 is now available, with deliveries starting in 2-4 weeks. At that price point, much like early Fords, the car is only available in black. More interesting is that to make this car in a financially responsible way, Tesla is closing its stores and moving to global online only sales. Tesla expects this move to enable an average price cut of 6% across its lineup. Customers can return a car after a week or 1,000 miles. CEO Elon Musk in a press conference also said he does not expect a profitable first quarter but second quarter profit is likely. We are not changing our fair value estimate because we've long modeled increases in vehicle sales as Tesla expands its product lineup.

Model 3 reservations started nearly three years ago, so we find the online sales news more interesting. Tesla has long fought a battle with state dealer associations and the National Automobile Dealers Association about selling vehicles direct. Some states, such as Texas, have very strict laws that Tesla has not succeeded in changing, so in those areas it has galleries where consumers can get information but not buy a vehicle. The vehicle is technically bought from a Tesla store in another state and we imagine this same method will apply in the online model for states like Texas. Tesla will keep galleries open in high volume areas globally but sales are now online.

We like the idea of easing the buying process, but we expect legal challenges from the likes of NADA. The other key challenge is will consumers who are comparison shopping Tesla with other brands be willing to buy sight unseen as opposed to going to say a BMW dealer for a free test drive and then buying the BMW. Ultimately Tesla needs to appeal to the mass market, not just its loyal fans, and it's possible consumers in large volumes won't be willing to take the purchase risk even with the generous refund policy. Time will tell.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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