Sizing Up The Revenue Potential Of Tesla’s Upcoming Model Y

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Tesla (NASDAQ: TSLA) is expected to unveil its new Model Y compact SUV at an event to be held on March 14. While production of the vehicle is only likely to commence by the end of 2020, we believe that it could emerge one of Tesla’s most important offerings, considering that it caters to the large and fast-growing SUV market. While we don’t have too many details on the new vehicle, the company has noted that the Model Y would look similar to the Model 3, although its dimensions are likely to be about 10% larger. The SUV is also expected to be about 10% more expensive compared to the entry-level sedan, meaning that its starting price is likely to come in below $40,000. However, we believe that the average selling prices are likely to be meaningfully higher, as Tesla is likely to offer a wide range of additional options, much like the Model 3. Below we take a look at what the vehicle could mean for Tesla.

We have created an interactive dashboard analysis that breaks down the revenue potential of the Model Y and how it could impact Tesla’s overall EPS by 2022. While Tesla does have a history of missing production timelines, this analysis should enable users to get a sense of the impact the upcoming SUV could have on the company’s financials (even if it is ultimately delayed). In addition, you can view all Trefis Consumer Discretionary company data here.

Why The Compact SUV Segment Is Important For Tesla 

The SUV market has been heating up, with light trucks (which includes SUVs) outselling cars by almost two to one in the United States. The compact SUV segment, in particular, is attractive as sales grew by 12.6% to 3.56 million vehicles in 2018, making it the largest auto segment in the U.S. by far. The segment is roughly 50% larger than the next largest segment – large pickups. The increasing skew towards SUVs is playing out in many international markets as well. Considering this, it is fair to assume that the Model Y could eventually outsell the Model 3 as its sales ramp up. Tesla, for its part, has indicated that it expects the vehicle to see demand of between 500k to 1 million units per year. We assume that Tesla will be able to deliver about 250k Model Y SUVs by 2022, with a bulk of sales happening in the U.S. market. This would translate into a C-SUV market share of over 6% for 2022.

Model Y Ramp Could Be Less Complex

Tesla has indicated that the vehicle would likely be initially produced at its Gigafactory in Nevada, with tooling likely to begin this year and production commencing by the end of 2020. It’s also likely that the company will eventually produce the Model Y (along with the 3) at its upcoming Shanghai facility. The production ramp for the new SUV could be easier compared to the Model 3, which saw significant delays. For instance, Tesla has indicated that 76% of the parts on the Model Y will be common with the Model 3. In comparison, the common parts between the Model S and Model X were just 30%. This could ease any potential supply chain-related issues. Additionally, Tesla appears to have ironed out many issues with regard to the Model 3’s automated production process over the last year, and production levels are estimated to stand at about 5,600 cars a week, up from just about 500 cars per week a year ago. Tesla has also said that the number of labor hours per Model 3 declined by about 65% in the second half of 2018. A more mature and less labor-intensive production system could bode well for the launch of the new vehicle. The company also expects the CapEx per vehicle to be lower than the Model 3.

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