Tesla: Some Interesting Changes Coming

| About: Tesla, Inc. (TSLA)
This article is now exclusive for PRO subscribers.

Summary

Low-end Model S will be eliminated.

Move creates separation with Model 3.

Capital raise increased in size.

With just a few months to go until Tesla (NASDAQ:TSLA) starts producing customer-ready Model 3 vehicles, the company is gearing up for its future. A recent report states that Tesla is going to eliminate the base version of its Model S, which seems like a decent move to provide separation in its vehicle lineup. Also, on Friday, Tesla finalized its equity/debt offering, raising more money than originally planned, to help with this launch.

According to Electrek, Tesla has started sending out e-mails to potential buyers warning them that April 16th will be the last day to order Model S vehicles with 60 kWh battery packs. The rear-wheel drive of the 60 goes for a starting price of $68,000 with the all-wheel drive version costing $5,000 more. Tesla says that most customers end up going with the 75 kWh version anyway, and the company wants to streamline its order process. As of now, the cheapest 75 model goes for $74,500.

This is a good move it would seem on two fronts. First, it is widely assumed that the 60 kWh vehicle is the lowest margin one, because of Tesla's pricing structure regarding battery packs. The 60 also provides the least amount of range, and Tesla previously eliminated the Model X version with this size pack. In fact, the company is now delivering a 100D Model S with a range of 335 miles now that an issue with the EPA has been resolved.

The other thing this major change will do is create separation in Tesla's lineup when the Model 3 arrives. Tesla says that the Model 3 will start at $35,000 before incentives for the base model, but fully stocked versions with larger battery packs could easily be close to Model S base pricing. The elimination of the 60 kWh Model S provides more of a gap, making the S a more luxury vehicle.

On Friday, Tesla also announced the terms of its equity and debt offering, raising 20% more funds than expected. Given how many were surprised that Tesla didn't raise more funds with this deal, I wasn't shocked that the offering was increased a little. Tesla will get even more than $1.2 billion if underwriters exercise their option.

Thanks to higher US interest rates and more Tesla risk, the 2.375% coupon rate on the five-year convertible notes was a lot higher than the 0.25% rate paid for five-year notes in 2014 and the 1.50% on five-year convertible notes in 2013. However, the rally in Tesla's shares this year allowed the company to sell stock at a higher price, limiting dilution a bit. If Tesla does raise more funds this year, as I expect it might, it likely won't come from debt or equity. I previously thought that Tesla could potentially tap credit lines and look to increase its maximum borrowings, and Elon Musk stated that could be the case:

Musk however thinks that the raise will be sufficient to bring the vehicle to "reasonable production levels", but he also left the door open for raising more money this year. He sees an 80% chance of them not needing to raise any more debt or equity this year and if they end up needing more capital, they plan "a revolver or asset-backed line or warehouse line".

As this week comes to a close, Tesla is certainly looking towards the Model 3's future. The company raised more than a billion dollars this week to help with the production ramp, and a recent report suggests the base version of the Model S will be eliminated. This new lineup should be good for Tesla's margins, and there will be more separation between the 3 and the S. While this might cost Tesla a few deliveries in the short term, higher selling prices will offset some or all of those losses.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.