Historical Stock Chart
3 Months : From Jul 2019 to Oct 2019
By Tim Higgins
Sales of Tesla Inc.'s high-end Model S sedan have taken a big hit in the company's most important U.S. market, California, as the electric auto maker is leaning more heavily on selling the lower-priced Model 3 compact car, new data show.
Falling sales of the Model S -- and its sister sport-utility vehicle Model X -- threatens Tesla's growth goals and profit ambitions as it must rely more on its cheaper Model 3 to make up the difference.
Registrations of new Model S sedans in the second quarter plummeted 54% to 1,205 in California, according to the Dominion Cross-Sell report that compiles data from state motor-vehicle records. The Golden State is a strong indicator of demand as Tesla's largest U.S. market, representing 40% of Model S registrations in the country last year, according to auto-sales tracker Edmunds.com Inc.
The new data from research firm Dominion Enterprises indicates the stylish sedan that arguably changed car buyers' view of electric cars is losing its luster. Tesla is increasingly dependent on sales of the smaller Model 3, which starts at about $35,000, less than half the price of the most basic Model S.
Registrations of Tesla's expensive Model X sport-utility vehicle also fell by about 40% in California during the quarter. Model 3 registrations, by contrast, nearly doubled in the state to 16,372. Registrations, which tend to lag sales by weeks, provide insight into where deliveries take place.
On Wednesday, Tesla is scheduled to report second-quarter results that could shed light into the erosion of high-end automotive sales and how it is affecting sales and profits. Tesla doesn't break out its sales by state.
Ahead of the earnings, Tesla shares recently traded at $257.80, down 15% over the past year but up 44% from their low in June.
The sales decline of the older, higher-end vehicles threatens the underpinning of Tesla's business, which Chief Executive Elon Musk has said was built on the assumption of delivering a combined annual total of 100,000 of the Model S and X vehicles. The company is targeting at least 360,000 total global deliveries this year, a more than 45% rise from last year.
Concerns about whether demand for Tesla vehicles have peaked emerged after the first quarter when sales dropped dramatically. Those concerns were eased by a return in the second quarter to growth for the smaller Model 3. Still, Model S and Model X continued to struggle six months into the year, raising questions about whether the Model 3 was eating into Tesla's established business. Sales of the two more expensive vehicles are down 33% for the year so far.
Analysts surveyed by FactSet, on average, expect total deliveries of the Model S and Model X vehicles to drop 30% this year compared with last year. Tesla has delivered a total of more than 158,000 of its three vehicles through the first half and would need to increase the pace of sales in the final two quarters compared with the record second quarter to meet its year-end goal.
"The key is cash flow, and people will look for whether they traded profit for volume in Q2," said David Whiston, an analyst for Morningstar Research Services. "Also, did they get enough [Model] 3 volume to offset the 21% decline in combined S and X sales."
Mr. Musk is betting the Model 3 will transform the company from a niche luxury car maker to one that sells affordable electric vehicles. He envisions selling millions of vehicles a year, an ambitious jump from selling just tens of thousands of vehicles two years ago.
With Tesla selling cheaper vehicles, analysts are increasingly worried about the company's ability to maintain higher margins. Analysts on average predict second-quarter margins, excluding revenue from the sale of credits, will fall to 20.1% compared with 24.7% in the fourth quarter. Some analysts, however, think Tesla has made progress in reducing costs and can stave off a steep decline.
The Model S made its debut in 2012 to rave reviews and helped Tesla credibly challenge against luxury sedans offered by Daimler AG's Mercedes-Benz and BMW AG. Though seven years old, Tesla has frequently updated the car's software, improved its front end and made other upgrades. Tesla earlier this year began offering a version that could travel 370 miles on a single charge.
Part of the issue for Tesla may be that the cheapest Model S is competing with the most expensive Model 3, said Shane Marcum, a vice president of Dominion Enterprises, the research firm that issued the registrations report. Until recently the difference in price was about $6,000.
That gap has widened to about $16,000. The most expensive Model 3 version now sells for almost $64,000, down from a fully loaded version going for about $69,000. Tesla last week increased the cost of the standard Model S to $79,990. It also effectively lowered the highest-priced version of the Model S to about $113,000 from about $130,000 by making the previous $20,000 Ludicrous Mode upgrade part of the performance version.
Simplifying the lineup could help Tesla reduce manufacturing complexity at its Fremont, Calif., factory ahead of starting production of the Model Y compact SUV planned for next year.
David Packham, 42 years old, said he is a happy Model 3 owner since buying the car in March. The Naples, Fla., man originally sought the most basic Model S but changed his mind after realizing he could get similar options with the fully equipped Model 3.
"When I added up what I got for the money...it was a no-brainer," Mr. Packham said. He said he would like to eventually trade the Model 3 in for the larger Model S if Tesla comes out with an updated version of the sedan with longer range and a more luxurious interior.
Mr. Musk on Twitter in recent days has tried to extinguish talk of a major refresh of the Model S, though the company already has hinted at a 400-mile range car coming someday.
Write to Tim Higgins at Tim.Higgins@WSJ.com
(END) Dow Jones Newswires
July 23, 2019 14:30 ET (18:30 GMT)
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