Few companies generate such a fierce debate as Tesla Motors (NASDAQ:TSLA).
I decided to look at Tesla from another perspective. What happens to the stocks of companies on the verge of major, even transformative, product introduction?
With its much lower price of $35,000, the Model 3 certainly qualifies as transformative, moving the electric-car maker from the luxury segment into the mass-market mainstream. It's a hot introduction, with a backlog of more than 400,000 pre-orders, a huge number considering the company produced only 83,922 vehicles in 2016.
Tesla expects to begin production in mid-2017, with deliveries before the end of the year. The company has a history of missing ambitious goals though, and CEO Elon Musk recently hinted at risks that may impact the timetable.
To look at the likely effect on Tesla stock, I chose five comparisons from companies that have had major introductions this decade, including Tesla itself. Each situation is different, but the outline of a pattern emerges. Let's take a look:
Apple: iPhone 6 and 6-plus
Date of introduction: September 9, 2014
What was new: First model with larger screen, other improvements including battery life and camera.
Result: Highly successful. Led to record iPhone sales in first quarter of 2015, 46% above prior holiday season.
Stock: Apple (NASDAQ:AAPL) rose from $74 in April to $103 in early September. It fell back to $95 in October but then spiked to $129 in February as model's blockbuster success became clear. Apple has never gotten back to that level.
Take-Two Interactive: Grand Theft Auto V
Date of introduction: September 17, 2013
What was new: Outstanding production values and storytelling in a new version of world's most popular open world crime simulation game.
Result: Great reviews and great sales. Today, the game has sold more than 65 million units.
Stock: The release had been anticipated for 2012, and when delays became clear, Take Two (NASDAQ:TTWO) fell from the $16 range to around $8. After that, it rose steadily, peaking at $19 a month before the introduction. It backed off to $16 by November before beginning a long rise that continues to this day.
Ford Motor: 2015 F-Series Pickup
Date of introduction: November 11, 2014
What was new: First aluminum-body pickup truck.
Result: Initially disappointing, due partly to production issues and some customer reluctance. Still, it maintained the F-series as the market leader with strong sales despite General Motors poking holes in it.
Stock: Ford (NYSE:F) topped at $18.01 in July 2014 and bottomed at $13.01 a few weeks before its introduction in October. It then started rising, eventually reaching $16.60 in March 2015, but has not returned to its prior peak.
Now let's look at a failure:
Hewlett Packard: TouchPad
Date of introduction: July 1, 2011
What was new: First tablet computer on Palm's WebOS interface (Apple bought Palm to get it).
Result: Failure as the iPad 2 launch got all the sales. The product was discontinued 49 days after introduction.
Stock: Hewlett Packard (NYSE:HPQ) topped out at $48.64 in February, four months before its introduction, but only one month before the competitive iPad 2 was introduced. HPQ was down to $37.05 by July 1. Three months later, it was at $22.45.
Finally, let's look at Tesla's previous model introduction.
Tesla Motors: Model X
Date of introduction: September 29, 2015
What was new: First luxury all-electric SUV.
Result: The introduction date slipped several times. Generally favorable reviews, except for the falcon-wing doors, but Consumer Reports viewed it as disappointing. Initial sales were hampered by production constraints.
Stock: Unlike most of the other examples -- and unlike the Model 3 -- the Model X wasn't intended to become the company's biggest-selling product. Still, Tesla performed much the same as Ford did, rising to $286 two months before the introduction and dropping to $204 a month after it, before staging a recovery to $240. It has not reached its prior peak.
Both psychology and economics are at work here. Both the Apple and Take Two cases show similar patterns, with the stocks rising as anticipation builds, and falling around the time of the introduction. Eventually, the stocks rose again as the success of the products became clear.
Ford followed a different pattern, bottoming before the introduction, and rising when fears proved overblown, but not back to the previous high. Tesla, with Model X, was similar, except the bottom occurred after the introduction.
Hewlett Packard fell significantly before the introduction as the failure of the TouchPad became anticipated, and continued downward as the disaster became real.
What does this mean for Tesla?
While every case is different, the most likely scenario would see TSLA continue its rise, peaking in the weeks before the introduction. It can be expected to settle around the time of the debut, as investors and traders sell the news. After that, it will rise or fall based on how well Model 3 is received by reviewers and, ultimately, the public.
Product delays as in the Take-Two case, or strong competition as in the HP case, could cause a major fall. Another negative is a possible capital raise to cover launch expenses.
Some readers may object that since Tesla has many other problems and does not show any signs of becoming profitable, it is already far overvalued and set up for a fall. While that may be true in the long term, the examples above indicate the Model 3 will be the most important factor influencing valuation this year.
Disclosure: I am/we are long AAPL, TTWO, F.
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.