Here’s Why Tesla Will No Longer Produce The Cheaper Variants Of Model S

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As Tesla Motors (NYSE:TSLA) gears to deliver its first mass vehicle – Model 3 later this year, the company is discontinuing the low end models of its luxury car Model S. This move is aimed towards simplifying the company’s order process. Also, with the launch of Model 3, these versions might lose customer interest as a high end version of Model 3 would be priced similar to these low end luxury versions, shifting customer preferences towards a higher end Model 3. We believe as the company streamlines its production process and gears up to meet the high demand for Model 3, discontinuation of these models should work in its favor, since it will lead to a simplified order and production process and allow the company to focus on Model 3 production.

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Model 3 Key Value Driver

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Once Model 3 deliveries begin in 2017, we expect this vehicle to be the key revenue and valuation driver for Tesla. According to our estimates, by 2019, Model 3 will contribute more than 50% towards Tesla’s revenues and EBITDA.

Tesla 20170321

According to our estimates, Model 3 accounts for nearly 50% of Tesla’s valuation and we expect this car to command a nearly 20% market share by the end of our forecast period.

The success of this model is critical for Tesla and while the company has received an overwhelming number of bookings for this car, production and delivery are critical. As it works towards streamlining its production process to meet the growing demand for Model 3, discontinuing the lower end luxury models will ensure that the company remains focused on its popular models. Before the launch of Model 3 a lower end luxury car made sense for Tesla’s customers who were unable to afford the higher end versions. However, with Model 60 and 60D priced around $60,000 which is close to the estimated price of $50,000 of a high end Model 3, Tesla believes that these versions are no longer needed. We believe this strategy should simplify Tesla’s order process and allow the company to focus on the success of Model 3 which is critical for its valuation.

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