By Alexandria Sage
SAN FRANCISCO (Reuters) – Tesla Inc said on Thursday it would not be profitable in the first quarter, as it offered for the first time a $35,000 version of its Model 3 sedan and said its global sales would now be online-only, steps designed to increase demand and cut overhead costs for the electric vehicle maker.
Chief Executive Elon Musk’s warning on profit during a conference call with members of the media, which did not include Reuters, contrasted with Tesla’s statements last month that it was expecting a “very small” net profit in the first quarter.
Shares of Tesla fell 3.4 percent after hours. Investors have voiced concerns about whether Tesla would be able to maintain profit margins through cost cutting – such as recent layoffs – as it reduces prices of its newest vehicle.
Still, the price drop could quell concerns from some analysts that demand for the higher-priced versions of the Model 3 was beginning to dry up in the United States, especially after a federal tax credit was cut in half this year.
“Tesla wants to drum up demand,” said Elazar Advisors’ Chaim Siegel. “There was a slowdown in the U.S. as the tax credits dropped. (There are) more tax credit hits later in the year too so they are trying to be proactive.”
Musk has often shared that his strategy for Tesla was to build higher-priced cars – the Model S and X – whose success would ultimately usher in a $35,000 mass-market car, followed by an SUV, the Model Y, which is currently in development. But customers who reserved the Model 3 at that lower price have waited nearly three years since Musk first promised it.
An online-only sales strategy, along with other changes, would allow vehicle prices to fall by about 6 percent on average, Tesla said in a blog on its website https://bit.ly/2IHjLw4. Over the next few months, Tesla will wind down “many” of its stores, while investing in its service system, it said.
Online-only sales represent a dramatic shift for the company that has prided itself on its boutique retail stores. In June 2017, Musk pledged to increase the number of stores, saying they had “barely touched the surface” of what was possible.
As of the fourth quarter, Tesla said it recently opened 27 new locations, bringing its total of stores and service centers to 378.
Thursday was the third time this year that Tesla lowered the price on the Model 3, which recently started at $42,900.
The new $35,000 version has a top speed of 130 miles per hour (209 km per hour) and can go from zero to 60 mph in 5.6 seconds, Tesla said. For $2,000 more, Tesla offers a version with a range of 240 miles (386 km) and a top speed of 140 mph.
GAME CHANGER WITH SPEED BUMPS
A $35,000 Model 3 is a major shot in the arm for Tesla sales during a period of major challenges, including deliveries of the Model 3 to Europe and China and construction of a factory in Shanghai.
“This is a game changer,” said Wedbush Securities analyst Daniel Ives. Since tax credits will continue to decline over 2019, “this is really exactly what the doctor ordered,” he said.
He warned, however, there could be “more speed bumps ahead,” if more sales volume exacerbates prior problems with deliveries and service to customers.
Musk declined to answer a question on what the profit margins of the $35,000 vehicle would be, according to the New York Times. Gross margins on the car were above 20 percent in the fourth quarter.
“The margin on the vehicle obviously is going to be very small if there’s any margin there at all,” said David Kudla, CEO of Mainstay Capital Management, which has a short position in Tesla.
As part of cost-cutting efforts, Tesla last month reduced its full-time headcount by 7 percent, following a similar cut of 9 percent to its workforce in June 2018.
The price cut on the Model 3 comes three days after renewed tensions between Musk and U.S. Securities and Exchange Commission. The agency petitioned a judge this week to have Tesla’s CEO found in contempt of an October settlement between the parties. The SEC accuses Musk of having made material statements about production levels on Twitter without first having them vetted internally.
That settlement between Musk, Tesla and the SEC concerned Musk’s August Twitter post in which he claimed to have “funding secured” to take Tesla private at $420 per share.
On Friday, Tesla is due to repay a $920 million convertible bond. Convertible issues give bondholders the right to trade their debt for equity after shares rise over a certain price. Tesla shares are currently about $40 below the $359.87 conversion price.
Tesla had $3.7 billion in cash and cash equivalents at the end of December.
(Reporting by Alexandria Sage; Additional reporting by Ben Klayman in Detroit and Vibhuti Sharma in Bengaluru; Editing by Lisa Shumaker)