Tesla Inches Toward Profitable $35k Model 3

Print Email

By Gene Munster and Will Thompson of Loup Ventures

This week Tesla announced a new Model 3 configuration, shifting the lowest-price Model 3 option from $49,000 to $45,000. The new option has an all-new “mid-range” battery pack and is only available in rear-wheel drive.

  • This is a sign that Model 3 production has stabilized.
  • The timing of lower-ASP configurations is also likely a sign that the company is improving manufacturing yields. This allows Tesla to effectively lower the price while inching overall Model 3 gross margins higher.
  • We expect the company will continue to target 20% Model 3 gross margins for the Dec-18 quarter.
  • We expect the $35k base configuration to be available within the next 4-6 months, generally coinciding with reaching a production run rate of 10k Model 3s per week (currently about 5-6k per week).
  • This change is good for Model 3 demand in Dec-18 and a potential headwind for demand in Mar-18 due to the fading US tax credit.
  • Tesla also dropped the $3k “full self-driving” option from the configurator. This is a powerful sign that the company misjudged the timeline to full autonomy. This may result in refunding the relatively few owners that have purchased this option. We don’t see this having a measurable impact on the balance sheet.

Why Limit Configurations?

To reach a $45K base model, Tesla shifted the rear-wheel drive configuration from the long range to a mid-range battery. Importantly, you can no longer configure a rear-wheel drive Model 3 with a long-range battery. This is noteworthy, given it is a subtle example of how optimizing for manufacturing simplicity can lay the groundwork for improving output and profitability.

Tax Credit Impact

After the full US tax credit of $7,500, the new lowest-price Model 3 costs $37,500. Previously, the lowest-price model after the full tax credit was $41,500. The US tax credit will begin to fade starting in 2019, first to $3,750 for the first 6 months, then to $1,875 for the remainder of 2019, going away completely at the end of the year. This, coupled with a new lowest-price Model 3 below $40,000, will pull demand into the Dec-18 quarter, potentially resulting in a demand headwind for Mar-1[9]. Tesla will most likely offset some of this headwind by working through the international order book, where they have more control over the mix.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.