Is Tesla Entering Self-Destruct Mode?

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Tesla recently announced their final version of the Model 3 sedan and it has people all over the world jumping up and down with tears of joy. It is hard to say the exact pre-order number, but as of April 1st there were about 276,000 orders for the Model 3. That number is expected to significantly increase in the next few weeks. Tesla’s stock spiked up from $233.10 a share to $251.24 a share in a matter of hours. This activity did not last too long and is now leveled off at $237.48 a share, however, it  can act as an overall profit for anyone holding Tesla stock before the announcement. Now you may be asking yourself, if Tesla stock received such a positive impact why did it level off so rapidly? The simple answer is, this was an announcement by Tesla. That means nothing is actually being done except pre-orders. The spike was simply an extremely small bubble in the stock for a short period of time. So, with 276,000 orders and growing, it looks like Tesla’s stock is going to enjoy the benefits of the Model 3

 

Or will it?

 

 

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Tesla’s stock performance as of April 5th

Tesla might have created more problems for themselves by trying to wedge their way into the middle class market instead of remaining in the upper class market. The starting price of the Model 3 at the moment is $35,000 and each pre-order included a $1,000 deposit. The reason I waited on telling you the price was to simply show you how the stock is performing and the company itself. Now it is time to examine the problems the Model 3 has given Tesla.

First off, Tesla received more than double the amount of orders the expected on getting. This is an incredibly large problem to overcome and find a solution to. So if we take 276,000 as the doubled amount, that means they were expecting 138,000, and don’t forget, that number is still rising. Also take into consideration that Tesla was expecting much less than 90,000 orders this early. There is no exact number given for what they were expecting, but there were rumors about expecting 117,000 orders by the end of the year. That number has been surpassed in a matter of days. An optimistic view is, “Good for Tesla, their profit margin is going to be amazing!” Unfortunately,a stock does not solely perform on profit. Tesla usually produces just over 50,000 cars a year in 2015. Surely they expected they needed to increase production with a new car, but 276,000+ more than usual? There is little reason to believe Tesla has prepared for this. How is Tesla going to reach the demand with supply? I am not even sure the gigafactory will be able to maintain production of this many orders this quickly. They will need to complete the gigafactory first! Tesla is going to have to hire a multitude of employees, and they are going to have to build manufacturing plants. This all needs to happen quickly if they plan on releasing the car in 2017, as they stated. This could be a huge dent in the profit margin for Tesla because they need to act quickly. The stock is most-likely not going to benefit from this.

Secondly, the Model 3 is not actually going to be $35,000. I am not going to go into much detail with this, so I will provide a link at the end of this paragraph for more information. The Model 3 is made to appeal to the middle class audience. The idea of a base price on a car is to make it appeal to the middle class buyers. However, the reality is that a car is never going to cost the base price. To fully obtain the “Tesla experience” a consumer will need to equip his or her Model 3 with a plethora of options and packages. So, that consumer can watch as the car slowly intrude the $40,000 to $50,000 price point. This insanity will cause many people to withdraw their pre-orders meaning Tesla will have prepared for a vast increase of production and slowly self-destruct from the inside-out. With the tremendous amount of demand Tesla has to fulfill, it is unlikely this will come at a cheap price. Not to mention, Tesla stock is incredibly overpriced. Read more about this. 

The third and final issue Tesla will drive into is the middle class consumer market itself. By joining the middle class market, Tesla is now facing new challenges from the best car manufacturers in the world. Think about it, Tesla is competing with BMW, Mercedes, Acura, Lexus, Infiniti, Nissan. These cars dominate that $30,000/$40,000 car range. Tesla built up a prestigious title for itself, and it is slowly disappearing by making a mainstream car, giving a company like BMW or Mercedes an advantage. Both BMW and Mercedes dominate the spectrum of middle to high class market. Why take on the leading companies instead of creating something unique? Not to mention, a BMW or Mercedes owner will always stay loyal to their company…they aren’t going anywhere. You’ll find that many BMW and Mercedes drivers stick to their brand, about 35% of Mercedes owners remain a customer and about 32% of BMW owners remain a customer. Those are the two highest loyalty percentages in the luxury market…those customers are not going anywhere.

Tesla is on its way to self-destruction. The gigafactory is not yet fully constructed which can hinder Tesla’s progress immensely. Without the gigafactory completed, and 276,000+ orders for just the Model 3, Tesla has a rigorous challenge ahead of them. From a marketing standpoint, Tesla needs to wedge the company into the middle class market. Without a strong manufacturing standpoint, and competition from the best car companies in the world, Tesla is going to self-destruct.

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Tesla Model 3

Read More Here:

http://finance.yahoo.com/echarts?s=TSLA+Interactive#{“range”:”5d”,”allowChartStacking”:true}

http://seekingalpha.com/article/3962690-teslas-unattractive-model-x-presents-continuing-financial-risk?ifp=0

http://www.fool.com/investing/general/2015/07/05/why-teslas-model-3-could-fail.aspx

http://www.autoblog.com/2016/04/01/tesla-model-3-preorders-capacity/

http://www.reuters.com/article/us-tesla-model3-research-idUSKCN0WY4H7

http://www.forbes.com/sites/jimgorzelany/2011/10/13/cars-with-the-most-brand-loyal-buyers/#5e39e16e7a1b

http://www.nation.co.ke/business/Tech/Tesla-racks-up-276000-Model-3-orders-in-just-days/-/1017288/3145268/-/djthb3z/-/index.html

 

About the author

Mike Alfieri is a 17 year-old student and a member of the class of 2017 at St. Mark’s. He has lived in Mendon, Massachusetts his whole life. He took advantage of the opportunity of going to private school to better himself and others. Mike has always had his mind set on one thing, business. He has a considerably large entrepreneurial attitude and approach. Whether it be investing, finance, commercial real-estate or international business, Mike takes great interest. He is fascinated with European culture and society from taking AP European History. Currently, Mike plays golf at St. Mark’s and is the leader of a fundraiser he created to raise money for the End Hunger New England organization. He hosted an event at St. Mark’s where the students and faculty packaged 13,000 meals to feed the hungry all around New England. Mike was elected Head Monitor in April of 2016 for his Senior Year. He holds leadership in the group of Monitors that are the school's representatives.

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