Tesla shares down 5% after Model 3 launch, sales shake-up

A Tesla Model 3 (Reuters pic)

NEW YORK: Wall Street reacted nervously on Friday to Tesla’s move to shut its network of showrooms and launch a long-awaited cheaper version of its Model 3 sedan, with its shares falling 5% and most analysts expressing concern over the company’s long-term margins.

In an announcement on Thursday, Elon Musk-led Tesla also lowered the prices on all of its cars by up to 6%. It was the third cut this year for the Model 3 after a US$2,000 price cut in January and a US$1,100 reduction last month.

“Taken in conjunction with the introduction of the US$35,000 Model 3, we view this (price cuts) as confirmation that demand for Tesla vehicles has softened,” RBC Capital Markets analyst Joseph Spak wrote in a client note.

Tesla said it now expects to record a loss in the first quarter after being “optimistic” about being profitable in every quarter of 2019.

The company attributed the potential loss to one-time charges and said it would likely be profitable in the second quarter.

Tesla shares were last down 3.5% at US$308.75

Investors have wondered whether Tesla, which has never posted an annual profit, will need to raise more capital to fund its expansion and pay off billions of dollars of maturing debts in the coming years. The company is due to repay a US$920 million convertible bond on Friday.

Since unveiling the Model 3 in 2016, Musk has been promising a US$35,000 version. A lower-priced Model 3 is seen as critical to its long-term viability as it needs to reach more customers who can afford the vehicles to offset slowing sales of costlier sedans.

The lower price could expand the Model 3 market by about 600,000 cars in the United States alone, based on historical sales figures for similarly priced sedans, Baird analyst Ben Kalo wrote in a note to clients.

The new shorter-range Model 3 will now be less expensive than its gasoline-powered counterparts such as a US$37,500 Audi A4, US$41,000 Mercedes C Class and the BMW 3 Series priced at US$40,000.

To save costs on its cheaper Model 3 version, Tesla plans to close most of its 250 stores and sell cars online.

“We do not think this was the original plan envisaged by Tesla management and bullish investors,” JPMorgan analysts wrote in a note.

“The Model 3 would prove more difficult and more expensive to manufacture than was originally projected, such that the firm would struggle to earn its targeted above industry average 25% gross margin as it transitions toward industry average pricing,” they said.