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Morningstar | Model Y Looks Great, and Tesla Is Following the Model 3 Playbook in Rolling It Out

Tesla unveiled the Model Y crossover the night of March 14, an important vehicle for two reasons. First, Tesla needs volume to generate cash to keep funding its growth and autonomous vehicle projects that drive its market value so high relative to its deliveries. Second, Tesla does not have a relatively affordable light truck because the Model X is a premium vehicle starting at $88,000. Light trucks are nearly 70% of new-vehicle sales for the U.S. industry each month, and crossovers are the most popular segment at 39% of all new sales last year. The Model Y moves Tesla closer to its goal of bringing sustainable electric transport to everyone. We are not changing our fair value estimate.

CEO Elon Musk wisely listened to advice last year and decided to make the Model Y on the Model 3 platform rather than spend more money to develop another platform. This is the same format as the Model X, and the Model Y not surprisingly bears a strong Model 3 resemblance but with a raised body and roofline. We think the Model 3's exterior is appealing, and the Model Y follows suit and should sell well. Range across the four Model Y trims is between 230 and 300 miles, which should make the vehicle appealing to German Three customers who have not experienced Tesla yet.

Tesla plans to start deliveries in late 2020, but ordering in North America, China, and eight European nations is live. The $47,000, $51,000, and $60,000 starting price versions will be available first, while the entry-level $39,000 230-mile model is estimated in spring 2021. This format is similar to the Model 3, which started with higher-end versions, and the $35,000 model just went on sale a few weeks ago. Also like the Model 3, a deposit is required, but the Model Y's $2,500 deposit is more than the $1,000 Model 3 deposit when Tesla first started taking orders for it in 2016. We assume Tesla will use the funds for general purposes rather than hold in escrow.

Tesla's stock declined about 4% in early trading on March 15, an example, in our opinion, of the investing adage buy the rumor and sell the news. But we think it also indicates growing pains for Tesla. As more automakers start making electric vehicles and lower-priced Teslas become less of a novelty, it becomes harder for the firm to pop its stock from product unveilings without including something jaw-dropping. This is a problem for all automakers, but we are confident that Tesla will continue to make, for the most part, great-looking vehicles with leading range to help differentiate itself. But only time will tell if that will be sufficient to get enough consumers to pay up for their vehicles in enough volume to generate scale.