Tesla Sunsets Model S and X
Tesla’s (TSLA) eccentric and unpredictable CEO is known for throwing surprises into earnings conference calls, and Wednesday was no different. On Tesla’s Q4earnings call Musk surprised Wall Street analysts by declaring,“It’s time to basically bring the Model S and X programs to an end with an honorable discharge.” Adding, “If you’re buying a Model S and X, now would be the time to order it.”
Why is Tesla Ending Model S and X Production?
The Model S, a luxury sedan that starts at $95,000, and the Model X, a luxury electric SUV that starts at $100,000, are among Tesla’s oldest models. In fact, these models were necessary ingredients for Musk to sell in order to deliver consumers proof of concept, make EVs “cool”, and finally, make the low-cost mass market Model 3 go from dream to reality.
However, Musk and Tesla are likely ending production of these models for three main reasons:
1. Financials: Since the Model S and X were first introduced, the EV market has become far more competitive, and prices have dropped significantly. Currently, these two models account for less than 5% of Tesla’s overall revenue.
2. Fremont Factory Use: Tesla will retool its Fremont, California, factory to begin production of the Optimus humanoid robot. Fremont is the largest manufacturing plant in California and will help Tesla scale up Optimus production. (Musk says one million Optimus robots per year is eventually possible)
3. Pivot to Autonomy: Although Elon Musk has been steering his team further away from the legacy EV business, the Model S and X news shows he is all-in on the next generation of Tesla products.
Elon Goes All in on Autonomy and Robotaxis
Unlike traditional entrepreneurs who slowly test new ideas, Elon Musk has a history of making bold, seemingly risky, all-in bets and being correct. For instance, Musk famously nearly squandered his PayPal fortune to save Tesla and SpaceX when they were on the verge of bankruptcy. Meanwhile, Musk famously and stubbornly removed LiDAR sensors from self-driving Teslas even at the behest of top Tesla executives who warned against it.
While Musk’s grand ambitions seem crazy in real-time, they often come to fruition. For instance, years ago, when Elon and his brother Kimbal pitched a “Yellow Pages” executive an online version of a city map (Zip2), the executive threw a Yellow Pages book back at them. Based on Musk’s history, it’s fair to say that he has all his chips on the autonomy and robotaxi basket. In the meantime, the legacy EV business will provide cash flow to Tesla’s new ventures.
With the EV Business in the Backseat, What Should Investors Watch?
Based on Elon Musk’s comments and his business decisions, Tesla is a stock that will trade almost entirely off the potential of its future product line. In the coming earnings calls, the stock will move based on progress across three key segments: continued Tesla Energy growth, robotaxi expansion, and Optimus production progress.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
