Why The Roadster Matters For Tesla

Tesla (NYSE:TSLA) had a surprise announcement in store during its Semi truck event held last week, unveiling an all-new version of the Roadster sports car, which it discontinued in 2012. The vehicle boasts very impressive performance per Tesla, including a 0 to 60 acceleration time of just 1.9 seconds, which would make it the fastest production car in the world. The car will also carry a 200 kWh battery pack, which would give it a 620-mile range per charge. In comparison, a base Model 3 offers just 220 miles. That said, volumes on the vehicle are likely to be very low given its high starting price of $200k. There could be concerns that Tesla is biting off more than it can chew at this point, given its current production woes with the Model 3, the planned launch of the Semi in 2019 and its high cash burn rate. However, we think that there are some good reasons for Tesla to get back into this ultra-premium space, which we discuss below.

We have a $205 per share price estimate for Tesla, which is well below the current market price.

Halo Product At A Time When Competition Is Mounting

We view Tesla’s early entry into the EV market and its brand as selling points for the company. It’s possible that the new Roadster will also serve as a “halo” product for the company, boosting the brand image of other Tesla products including the mass market Model 3. It is becoming increasingly important for Tesla to bolster its brand image, as the advantages of the shift to all-electric drive trains (superior acceleration, lower maintenance, and running costs) are unlikely to remain exclusive to the company over the long term. Mass market manufacturers such as GM and Nissan have already proven that they can manufacture relatively compelling electric products, such as the Bolt and Leaf, and players like Volkswagen are planning to invest about $40 billion over the next five years to develop EVs (related: Does Tesla Really Have An Economic Moat?). Bt producing the world’s fastest production vehicle at a super-premium price point, Tesla could potentially improve the perception of its other vehicles as well.

Margins Should Be Very Lucrative, Reservations Provide Interest-Free Capital

Tesla is pricing the new Roadster at a $200k base price, with reservations open now for $50,000, although deliveries are only expected to begin in 2020. The company is also selling 1,000 Founders Series models with even better performance, priced at $250,000. The company expects prospective buyers to pay upfront to reserve this model. These reservation fees are well ahead of the $5,000 the company asks for from Model 3 buyers, and we believe that that should provide the company with a significant amount of interest-free capital. While the company’s track record of missing its production targets could hinder prospective buyers, Tesla could nevertheless net about $250 million and if the company manages to sell out its first 1,000 Founders series cars, with a further upside from the base model.  We believe that margins on the sports car should also be very attractive compared to Tesla’s current models. As Tesla only intends to manufacture the vehicle starting from 2020, it would be able to take advantage of declining battery costs. Moreover, being a low volume car, Tesla should be able to build it at its Fremont facility with minimal capital investment.

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