Tesla (TSLA) shareholders have experienced a bumpy ride so far in 2019. With the stock down more than 14% year to date, compared with an 11% rise in the S&P 500 index, the market has seemingly voted against the company’s decision to cut the price of its flagship Model 3 sedan. But are we missing the big picture?
On Friday the stock dropped almost 9% after the company announced late Thursday it would offer a $35,000 version of its Model 3 sedan. Not only did this news come several months before initially planned, Tesla also said it would close many of its retail stores worldwide. This news comes off the heels of the first batch of February delivery estimates, which — to some observers — weren’t as robust as they could be when compared to fourth quarter 2018 deliveries.
What really upset investors, however, was the significant price cuts for all Tesla models. Which is understandable, given the company’s continued need to raise capital. In a conference call with CNBC, CEO Elon Musk didn’t try to hide this fact, telling investors that the company would not turn a profit in the first quarter, but expected a return to profitability in the second quarter. Tesla shares closed Monday at $285.36, losing almost 10% just in the past thirty days.
This could be a good buying opportunity, however. Making the Model 3 more affordable and thus more mainstream, has been the point all along in enabling Tesla to compete with the likes for Ford (F) and General Motors (GM). For that to happen, it required a radical shift in the company’s strategy. One of the ways to achieve this, Tesla said it was shifting sales entirely online, which explains why it opted to close many of its retail stores, which the Musk says will become “information centers.”
“Shifting all sales online, combined with other ongoing cost efficiencies, will enable us to lower all vehicle prices by about 6% on average, allowing is to achieve the $35,000 Model 3 price point earlier than we expected,” Musk noted in a blog post.
These steps, in my estimation, are designed to do two things: First, as we have learned from Apple (AAPL), online orders is a great way to post demand. Second, and perhaps, most important, Tesla will also be able to cut massive overhead costs. Tesla recognizes the cars literally sell themselves. It doesn’t need salespeople to explain features that can be conveyed on a website or phone app.
The company said the speed of the new $35,000 version, which can go from zero to 60 mph in 5.6 seconds, would top out at 130 miles per hour. But for only $2,000 more, customers can get a Model 3 that with a range of 240 miles and a top speed of 140 mph.
"This is a game changer," Wedbush Securities analyst Daniel Ives told Reuters in a telephone interview. "Especially at this juncture when they're going through such a difficult period as the EV tax credit rolls off in the U.S., this is really exactly what the doctor ordered."
Sure, the company must be able to execute on this strategy. But in its attempt, Tesla not only would have generated higher demand at the lower price point, it would also be able to maintain profit margins, even after a federal tax credit was cut in half this year. As such, with Tesla stock down 26% from its 52-week high of $387, the risk-versus-reward scenario now favors the long side.