Morningstar | Tesla Closing All Stores to Sell the $35,000 Model 3 Is a Critical Moment In The Firm's Future
Tesla 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.
Tesla designs, develops, manufactures, sells and leases electric vehicles and energy generation and storage systems, and provides services related to its products. The company operates as two reportable segments: automotive, which includes the design, development, manufacturing, sales, and leasing of electric vehicles as well as sales of automotive regulatory credits; and energy generation and storage, which includes the design, manufacture, installation, sales, and leasing of solar energy generation and energy storage products, services related to such products, and sales of solar energy system incentives.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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