TSLA Tesla Inc

By Tim Higgins 

Tesla Inc. on Wednesday said it cut prices for its entire vehicle lineup, raising concerns about future demand for the Model 3 after the electric-car maker's new compact sedan drove record deliveries during the final three months of 2018.

The $2,000 across-the-board cut lowered the starting cost for the Model 3 -- the vehicle Tesla is banking on to reach the mass market -- to $44,000. Tesla said the move was to help make up for the phasing out of federal tax incentives for its vehicles, beginning this year.

Tesla has been working toward offering the Model 3 compact sedan at $35,000, part of Chief Executive Elon Musk's bet Tesla can make a more affordable vehicle to fulfill his vision for broader adoption of electric vehicles in the auto industry.

But Wall Street on Wednesday was left questioning why Tesla was cutting prices for the Model 3 after spending all last year struggling to meet demand by increasing production of the car at its lone full assembly plant in California. The company in recent months was seeming to rebound from the turbulent year, turning a corner with a rare profit in the September quarter.

"The fear is that demand is slowing for Model 3," Toni Sacconaghi, an analyst for Sanford C. Bernstein & Co., said in an interview. "When you're a growth stock, if demand or revenue growth slows, or potentially might slow, that worries people."

The car maker on Wednesday said total deliveries -- including the pricier Model S large sedan and Model X sport-utility vehicle -- more than tripled to 90,700 in 2018's final quarter from 29,870 a year earlier. Analysts surveyed by FactSet, though, had expected total deliveries of 92,000 vehicles.

Tesla's shares fell 6.8% on Wednesday to $310.12.

Fourth-quarter deliveries of the Model 3 rose to 63,150 from 1,550 a year earlier. Analysts had expected 64,900. Total deliveries for the full year reached 245,240. In 2017, the auto maker sold 102,807 vehicles after struggling to increase production of the Model 3.

Tesla said there remains "significant opportunities" to continue sales growth of the Model 3, noting international expansion, offering lower-price versions and leasing options. Deliveries of the compact car, for example, begin in Europe and China in February, the company said.

Producing the Model 3 had proved harder than Mr. Musk had expected, and Tesla missed several self-imposed deadlines to ramp up production to a rate of 5,000 a week.

The chief executive had promised to increase sales and production of the sedan in the fourth quarter, urging potential buyers in recent weeks to take advantage of a $7,500 federal tax credit that drops to $3,750 for its vehicles in the first half of this year, and eventually zero by next year.

The fourth quarter also marked continued work by Tesla to resolve logistics issues that plagued efforts to put new Model 3s in the hands of the customers after the factory improved production. Mr. Musk on Twitter in November said the company had acquired additional trucking capacity to get vehicles delivered ahead of the year's end.

Wall Street might be taking the price cut as a negative sign, potentially signaling that Tesla had reached a limit on the number of customers willing to pay a high price for the compact sedan.

The price reduction is a "likely" indication of a demand peak in the U.S. for early adopters, Jeffrey Osborne, an analyst for Cowen, said in a note to investors.

Joseph Spak, an analyst for RBC Capital Markets, wrote that the development supports his theory that Tesla was trying to maximize sales of higher-priced Model 3s and that the bulk of the backlogged reservations for the car is for the long-promised $35,000 version.

Tesla in October surprised Wall Street with a record profit in the third quarter, thanks to increased production of the Model 3. Mr. Musk said the company had reached the point where it can sustain profitability going forward.

His vision of personal transportation has excited investors, who have boosted the company's market value above that of General Motors Co. despite Tesla never having turned an annual profit and selling a fraction of the cars.

Mr. Musk has been trying to cut the cost of making the Model 3 so Tesla can lower its price. In August, UBS Securities LLC estimated that a $42,000 Model 3 would eke out a $670 operating profit, while the then-lowest-cost version at $49,000 would make more than $3,000. A $35,000 version was estimated at the time to lose about $2,300 a car.

For Tesla and its chief executive, 2018 marked a challenging year. While the company more than tripled global deliveries, the number was far shy of what Mr. Musk has predicted in recent years.

In 2016, he had suggested the company could make as many as 200,000 Model 3s in 2017, while ramping up production on all its vehicles to 500,000 in 2018.

Even as Tesla became the rare new U.S. auto maker to survive beyond infancy, its cash levels ran low as it grappled with manufacturing delays. Mr. Musk, meanwhile, didn't help himself with sometimes erratic public behavior. He appeared to smoke marijuana during a live interview and announced on Twitter in August he had secured funding to possibly take the company private at $420 a share.

The Securities and Exchange Commission said he misled investors with those comments, and sought to strip him of serving on publicly traded companies as a director or officer. Mr. Musk settled the SEC claims, retaining his CEO role at Tesla but giving up his title as chairman.

Last week, Tesla added Oracle Corp. Chairman Larry Ellison -- a close friend of Mr. Musk -- and Kathleen Wilson-Thompson, global head of human resources for Walgreens Boots Alliance Inc., to its board as part of the SEC settlement. The move followed the elevation to chairman in November of Robyn Denholm, a veteran finance executive who joined the board four years ago.

All the while, Tesla was trying to keep pace after finally reaching its 5,000-a-week production goal for the Model 3 during the final seven days of June. In the fourth quarter, Tesla built a total of 61,394 Model 3 sedans, or on average 4,723 a week during the period's 13 weeks.

The company also slightly missed its goal of delivering a combined total of 100,000 Model S and Model X vehicles during the year. Tesla delivered 13,500 Model Ss and 14,050 Model Xs in the fourth quarter, raising the total for the year to 99,394 compared with about 100,000 in 2017.

--Kimberly Chin contributed to this article.

Write to Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

January 02, 2019 19:19 ET (00:19 GMT)

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