In this briefing:
1. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up
Tesla’s innovation, as we have been opining in our insights on Smartkarma, rests more on its direct distribution model than on technological innovation. Tesla’s press release on Thursday, February 28, announcing the new $35,000 Model 3’s came with several other details that have been highlighted in press reports which we also summarize here:
- Management does not expect to achieve profitability in 1Q19, with a likely 2Q19 profitability according to the press release.
- According to the announcement, all Tesla sales will move online, first in the U.S. then expanding worldwide. An unspecified number of sales outlets will also be closed “with a small number of stores in high-traffic locations remaining as galleries, showcases and Tesla information centers.” (see attached copy of the Form 8K).
- Management promised to increase investments on after service.
- According to press reports, CEO Elon Musk was also quoted as saying there will be layoffs with the new distribution plan (see https://edition.cnn.com/business/live-news/elon-musk-tesla-announcement/index.html).
We believe this is a defensive move on the part of Tesla management. In our published Tesla insights on Smartkarma in the past, we have highlighted that Tesla’s main innovation has more to do with the way it marketed and distributed its products as opposed to conventional research focus on technological innovation. We have also noted that the company’s direct distribution model comes with a a significantly higher SG&A burden compared with traditional automotive OEMs. While the announcement seems to have shocked the investor community enough to send the shares tumbling on Friday, we believe that operationally the announcement was really a question of “when” as opposed to “if”.
The Tesla Model 3
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