Tesla Model 3 at the initial handover event
In a huge and extremely thorough analysis of Tesla, Model 3 profit margin registers as the key point for the automaker.
Bernstein's Toni Sacconaghi just released a whopping 112-page research document regarding Tesla. According to Barron's, it's a "mammoth black book" complete with charts and graphs and loads of data. Among Sacconaghi's plethora of findings, he feels there's no more important detail than the automaker's realization of Model 3 profit margins. He writes:
According to Bernstein's Tony Sacconaghi, it's not likely that the Tesla Model 3 can enjoy the same profit margins of the more expensive Model S and X
"For hyper-growth companies, delivering healthy gross margins is critical.”
It's important to note that Sacconaghi is an EV supporter of sorts. He's gone so far as to say that electric cars will reach 60 percent market saturation by 2050. He refers to Tesla stock as "the most controversial and polarizing stock among all the stocks" that he covers.
His Tesla target stands at $265 and he gives it a Market Perform rating. Sacconaghi believes that the Silicon Valley automaker surely has some positive attributes, including its appealing brand name, direct sales model, first-mover advantage, and structural assets.
Aside from all of this, Sacconaghi is concerned that the Model 3 may not be able to reach profit margins guided by CEO Elon Musk. The scarier part of this concern is that he forecasts 70 percent of Tesla's 2018 production will be focused on the Model 3, which makes perfect sense due to Tesla's reality at this point. If a majority of production is not able to generate profit over an extended period of time, this could become a significant issue.
Musk has shared that the new, more affordable electric sedan will see a 25 percent gross profit margin, which mirrors that of the Model S and X. However, generally, automakers can't pull equal margins from less expensive vehicles as that of higher-priced vehicles. Sacconaghi explains (via Baron's):
"At a high level, we struggle with two simple facts about Tesla and the Model 3:
First, Tesla only has ~25% gross margins (and makes no money) on its existing US$100,000+ Model X and Model S offerings, while competitors at similar price points likely have 40-50% gross margins and operating margins of 20%+. The upshot is that it is difficult to see Tesla enjoying 25% gross margins on the lower-priced Model 3, particularly since competitors have dramatically lower margins on their lower-priced offerings.
Second, we believe that Tesla total Model 3 powertrain costs (battery + drivetrain) will likely amount to US$11,000+ vs. a typical ICE powertrain of US$3,000-US$5,000. In other words, all else being equal, Tesla is ~US$6000+ more expensive to produce, and will have smaller scale than its competitors."