Tesla (NASDAQ:TSLA) has had a rough stretch recently, with news both bad (missed delivery targets) and tragic (the first reported death while a driver was using the autopilot system) as well as continued concerns over a questionable merger with SolarCity (NASDAQ:SCTY), which is another company in which founder Elon Musk has a financial interest.
Somewhat lost in this news was Tesla's recent decision to begin offering a 60 KWH version of its popular Model S sedan. As you can tell by the headline, I think they are making a mistake with this product. The mistake is not with the idea of a lower-priced Model S, as over 400,000 reservations for the upcoming Model 3 show there is ample demand for a lower priced Tesla. Rather, the mistake is in the execution.
Tesla's solution for producing a 60 KWH Model S is to take the 75 KWH battery pack and limit it to 60 KWH using software. Honestly, I'm having a hard time wrapping my head around this decision. It doesn't make great business sense, and quite frankly, it doesn't look good to customers. As Musk has often said, Tesla's current problem isn't lack of demand - they are able to sell every vehicle they produce. The problem is producing those vehicles and getting them to customers, as we've seen in the most recent quarter. If this is the case, why is Tesla letting a vehicle go out the door for $66,000 as a 60 KWH version when it could have easily sold it for $9,000 more as a 75 KWH version? This especially doesn't make sense for a company that's still burning cash at an alarming rate.
This can't leave the buyer of either car with a good feeling. The buyer of the 60 KWH model drives around knowing they have a handicapped car and the $9,500 fee to upgrade will be hanging over their head. The extra $500 charge because they chose to upgrade after the fact is really just the icing on the cake. The 75 KWH owner can't be too happy either as they've paid more for a car that Tesla is apparently happy to let go for $9,000 less.
Part of me wants to compare this to what Apple (NASDAQ:AAPL) has done for a long time with iPhone memory, keeping the 16 GB model there really to force most buyers to spend the extra $100 to move up to 64 GB. At least with Apple, they actually put more physical memory in the phone. It costs nowhere near $100, but at least it costs something. Can you imagine the outcry if Apple made all iPhones 64 GB and then limited the capacity to 16 GB with software?
I'm sure there are economies of scale to producing only 75 KWH batteries as opposed to both 75 KWH and 60 KWH, but again, I can't see any way that the optics of this end up looking good. And if significant numbers of Model S buyers decide that the 60 KWH version is good enough for them, and with a range of over 200 miles, it should be for most people, this will put significant pressure on Tesla's margins and keep the cash burn rate high as well.
One saving grace for this lower priced option could be if the software automatically adjusts as the battery ages and degrades, thus keeping the performance at 60 KWH for much longer. However, I have yet to see any reporting to that effect.
I understand it's probably not wise to bet against someone who has managed to revolutionize both the auto industry and the space industry simultaneously, so I'm not recommending a short here. I'm also influenced by the fact that every time I see a Model S driving down the street, I can't help but say to myself, "wow, I want one of those." I'm staying away from this stock though, as I expect the production ramp issues combined with the business case issues I've outlined above to make for a rocky ride until the Model 3 comes out.
Disclosure: I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.