The Model 3 Can Hurt Tesla in Many Ways

Tesla (TSLA) unveiled its Model 3 last week, and I have to admit, the car is great. While there is no doubt that Tesla makes great products, I don’t think the stock is a good investment right now. The Model 3 can harm Tesla in more ways than one, which is why I think investors should sell or short sell the stock.

Profitability

Tesla has been losing money at a rapid pace. In 2015, Tesla burned through over a billion dollars in cash and the company’s is now down to its last $1 billion in net cash.
However, it is important to note that Tesla was losing all that money when it was selling luxury cars for over $70,000.

With Model 3 expected to hit the market in two years, Tesla’s profitability could decline further as the company is selling an equally efficient car in the form of the Model 3 at half the price. Tesla aims to make up for the cheaper cost by economies of scale, but that dream looks farfetched for the time being.

Tesla has always struggled with supply problems. The company has failed to deliver on its promises many times in the past. So, while Tesla’s Model 3 bookings are nearing 300,000 units, I don’t think the company can fulfill all the demand. To assume that Tesla will sell over 300,000 units annually within two years looks unlikely. However, the company can capitalize on the current overvaluation of the stock by diluting shares. By diluting just 10% of its equity, Tesla will raise over $3 billion.

Cannibalizing Model X demand

While the model 3 is expected to hit the market in two years, it can hurt Tesla’s current sales. Given that the Model 3 is on par with the current Model S in almost every aspect and is 50% cheaper, many buyers will be tempted to not buy the Model S and wait for two years to buy the Model 3.

Tesla saw its Q1 Model S deliveries plummet 54% year over year in Norway. While the Model 3 and Model S have different price points, it is possible that the strong bookings of the Model 3 are hurting the deliveries of the Model S.

Conclusion

While the Model 3 is a great product, I think it can hurt Tesla in the short, as well as the long term. Tesla will probably dilute equity to fund its growth, which is why I think investors should have a bearish stance at least for the short term.
Published on Apr 7, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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