Tesla had some bad news and some good news when it released first-quarter earnings.
The bad: It reported revenue and earnings that were below Wall Street expectations, and posted negative free cash flow.
The good news: Cheaper Teslas are on the way!
Tesla's plan to accelerate the launch of new models — including more affordable cars — and talk of a robotaxi service was enough to send the stock price higher despite the earnings miss.
The investor reaction suggests Wall Street has bought into the idea that cheaper vehicles will help solve some of Tesla's demand challenges.
EV sales growth has slowed in part because most of the options are more expensive than the average car purchase in the US, or so the theory goes.
"If you have a great product at a great price, the sales will be excellent," CEO Elon Musk said Tuesday on an earnings call.
That might ordinarily be true. But Tesla is no ordinary product. Even at a lower price, say $25,000, it's a very significant purchase — likely one of the most expensive purchases a person will make.
So let's for a second look at why a lower ticket price might not be a panacea for Tesla.
Switching from gas to electric is a big deal
Many EV buyers thus far have been early adopters, and there are many, many more car buyers who are yet to be convinced. It's part of the reason hybrids have been having a moment, as an intermediate step from gas-powered cars to fully electric vehicles.
It's possible that there are a bunch more buyers out there who would love to buy a Tesla but just can't afford one. How big is that group of buyers? It's not clear.
"These new vehicles still bring a lot of new, unanswered questions, and TSLA didn't really address, leaving us to believe much is still in flux," UBS said in a note following the earnings release.
"What are they really, and what buyer are they targeting other than 'lower cost'? Lower cost may not be enough because of lower used Tesla pricing," the note added.
For context, a quick search of Carvana reveals a whole bunch of used Teslas priced in the $25,000 to $30,000 range. Many of those listed have seen recent price drops.
Are they a good deal? It's hard to say. The resale data for used EVs is sparse, and the longevity of batteries is scattershot as technology improves.
Infrastructure challenges remain
EVs also require entirely different infrastructure from gas-powered vehicles, and anxiety over battery range and charging stations continues to be a real issue for EV owners.
The number of charging stations in the US has grown gradually over the years, but operators have struggled with maintenance and uptime issues — and some lack the amenities like snacks and bathrooms you'd find at gas stations. It's also worth noting that a full charge for a Tesla, which has nearly 7,000 US charging stations, could take up to 30 minutes.
Maybe infrastructure isn't a core concern for the archetypal early Tesla buyer: someone who might be a tech employee in California with plugins in their garage or driveway — and also at their office. There are many other Tesla buyers, of course, but as Tesla introduces lower-cost models in search of different buyers, needs will shift.
Today's buyers of a Honda Civic or Toyota Camry, two of the most prevalent cars on American roads, may not be willing to invest the time and money in perfecting their home-charging setup, which can require an electrician to install high-voltage plugs in a convenient spot. And that's, of course, only if they own their own parking space. Installation might be trickier for people living in apartment complexes, urban townhouses, or myriad other housing situations.
Musk and Tesla are politicized
As Tesla looks to lure potential new buyers with a cheaper car, it will have to contend with souring consumer sentiment toward the EV maker.
The number of US consumers who say they would consider buying a Tesla fell to 31% in February — down from 70% in November 2021 — according to research recently published by Reuters. Some Tesla owners had previously told BI that they were rethinking their allegiance to the brand due to concerns over Musk.
Tesla is also facing headwinds in China, where it's losing ground to fierce local competitors like BYD.
BYD sells one EV model for less than $10,000 in China, where Tesla's Model 3, by comparison, costs about $32,000.
Tesla's share of the Chinese auto market fell to 6.7% in the quarter ended December, compared to a 10.5% share in the first quarter last year, Bloomberg reported based on China's Passenger Car Association data.
Time will tell for Tesla
It's still not entirely clear when a new more affordable model might arrive, though Musk floated the possibility of early 2025.
Elon Musk has a history of overpromising on timelines. The Cybertruck, for example, was supposed to go into production in 2021. Deliveries to customers didn't start until late 2023.
If and when the cheaper car does arrive, it may take off. Renault has had some recent success with lower-priced EVs, for example. It could make Tesla more attractive in markets like India. Maybe the pool of buyers for a cheap Tesla will be ginormous. Betting against Elon Musk has been a losing proposition over time.
But it's worth considering what might happen if it's not an instant success.
