Tesla Model 3 Chaos! Leases, SR And LR Gone, SR+ In The EU, Stealth Price Cuts

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About: Tesla, Inc. (TSLA)
by: Fishtown Capital
Summary

Model 3 SR is eliminated less than 6 weeks after being introduced, purportedly because of low customer interest.

Autopilot is now standard in all Model 3's. As a result, the least expensive Model 3 SR+ now costs $39,500.

Model 3 AWD price increases by $1,000, Performance stays as-is. Since most of these models were sold with Autopilot, this results in a stealth price cut.

Leasing is now available for all Model 3's.

Tesla quietly introduces SR+ into the EU, signaling demand exhaustion after just a few months of AWD and Performance Deliveries.

Late Thursday night, Tesla (TSLA) made significant updates to the Model 3 Lineup, the 4th move in as many months. These include the introduction of the highly anticipated leasing option for Model 3's, elimination of LR RWD and SR RWD models, and the inclusion of Autopilot as standard equipment with corresponding price changes for the SR+ and AWD. Not included in the announcement, but available on the Tesla configurator is that the SR+ can now be ordered in the EU.

I believe these moves signal that Tesla has hit the demand cliff and is trying to maintain volume any way it can.

Leasing

Tesla has now introduced domestic leasing on the Model 3. It's unclear how much demand this will drive, as the savings to customers is moderate at best. Using the price estimator tool on Tesla.com and using the same $3000 down payment between the loan and lease, we see a savings of less than $100/month with 10,000 miles/year.

Note that these lease prices still benefit from the $3750 FIT credit. When that credit is reduced by $1875 on July 1st, the lease costs will increase $58/mo, and will increase another $58/mo at the end of the year. In under 9 months, the lease on the SR+ will be over $600/month. Consider that in 2016, you could have leased a Tesla Model S 60 for less!

I believe this will drive a small amount of demand for all models, purely based on consumer preferences for leases, with an additional amount of demand for the SR+ in Q2. This increase in demand will likely be short lived when the FIT credit is reduced by another $1875 on July 1st.

Model 3 SR+ now available to be ordered in Europe

Perhaps the biggest piece of news, which was absent from the official announcement, was the introduction of the Model 3 SR+ into EU markets, as we can see on Tesla Norway at kr. 367,700 (approximately $43,000) and Tesla Germany at 44,500 Euro ($50,230).

There is only one conclusion I can draw from this, which is that EU demand for the high end Model 3's has been mostly exhausted after just two months and roughly 20,000 deliveries.

Elimination of the Model 3 Standard Range

Tesla is eliminating the highly anticipated $35,000 Model 3 Standard Range less than 6 weeks after introducing it, using the following rationale

Given the popularity of the Standard Plus relative to the Standard, we have made the decision to simplify our production operations to better optimize cost, minimize complexity and streamline operations. As a result, Model 3 Standard will now be a software-limited version of the Standard Plus, and we are taking it off the online ordering menu, which just means that to get it, customers will need to call us or visit any one of the several hundred Tesla stores. Deliveries of Model 3 Standard will begin this weekend.

While Tesla claims that the Model 3 SR can still be ordered at a Tesla store (the same Tesla stores the company recently sought to eliminate before walking back that decision) this will only be for a limited time, similar to how they've handled other models. It's unclear how many additional Model 3 SR orders Tesla will accept, if any.

This move makes sense for Tesla. By forcing customers into the SR+ and requiring Autopilot, they've raised the price for the least expensive Model 3 by $4,500 without raising the cost of goods, since Autopilot is software and all margin. Elon Musk stated in late November the Model 3 cost of goods was around $38,000. I see no reason to believe it is any lower now considering that both production and delivery volume has decreased, which raises the fixed portion of production costs per unit. I believe Tesla is setting the lowest Model 3 price around break even to maintain volume.

I believe the $35,000 Model 3 was little more than a PR stunt and Tesla is eliminating it because it was negative margin, not because of their stated claim of lackluster demand.

Stealth Price Cuts on higher end Model 3's

As a result of the inclusion of Autopilot on all Model 3's, Tesla increased the price of the Model 3 AWD by $1,000 to $49,500 while leaving the price of the Model 3 Performance unchanged at $59,500.

From Troy's Model 3 tracking spreadsheet, the reported Autopilot attach rate was 77% for the latest quarter. But if we look back to Q3 2018, when Tesla sold only LR RWD, AWD, and Performance, the attach rate was 81.2% even though Autopilot cost $5000. At the reduced Autopilot cost of $3000, the attach rate is likely around 90% for both of these models, making this little more than a $2,000 price cut for the Model 3 AWD and a $3,000 price cut for the Model 3 Performance.

Elimination (again) of the Tesla Model 3 Long Range

The Model 3 LR (Long Range) RWD Model has now been removed from the lineup for a second time. This now joins the Model 3 SR and Model 3 MR (Medium Range) RWD that was just introduced in October at $45,000, quickly increased to $46,000, cut to $44,000 in January, $42,900 in February, $40,000 in early March, and then quietly eliminated on March 14th.

Conclusion

Tesla is behaving like a organization in crisis. These moves seem like poorly conceived, reactionary measures to maintain sales volume in the face of plummeting demand, sacrificing margin and long term business viability in the process. At a time where they desperately need to transition sales from early EV adopters and enthusiasts to a broader mainstream market, the constant price changes and lineup shuffling will only serve to confuse customers.

Evercore ISI analyst Arndt Ellinghorst described the March price changes and store closures as "amateur hour" and "pure price confusion for the consumer." It doesn't appear that Tesla has learned their lesson.

Disclosure: I am/we are short TSLA. 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.