Tesla’s stock experienced a significant decline following the launch of new hardware. While many attributed it to the release of an updated Model 3, other factors, particularly software-related, might have played a more substantial role.
Stock Performance Analysis: On the day of Tesla’s stock decline, it experienced a significant drop of 5.1%. In contrast, the broader market represented by the S&P 500 saw a modest increase of 0.2%. This notable discrepancy in performance raised concerns and triggered discussions about the potential factors influencing Tesla’s stock price.
The New Model 3: The launch of an improved Model 3 in China and Europe was expected to boost sales for a model that has been on the market since 2017. However, the news was received less enthusiastically, possibly due to Tesla’s stock having already risen by about 18% in the preceding two weeks. Investors might have also hoped for more significant changes in the new Model 3, despite the introduction of a new interior and increased per-charge driving range, among other improvements.
Full Self-Driving (FSD) Software Price Cut: Another factor potentially contributing to the stock’s decline is the price reduction of Tesla’s Full Self-Driving (FSD) driver assistance software, from $15,000 to $12,000. FSD is Tesla’s advanced driver assistance feature that CEO Elon Musk envisions will eventually enable Tesla vehicles to become fully self-driving. It’s worth noting that all driver assistance features require drivers to remain attentive at all times.
Elon Musk’s Previous Statements: This price cut was somewhat unexpected, as Musk had previously indicated during a second-quarter earnings conference call in July that the price of FSD was reasonable, given the potential increase in the car’s value if it became fully autonomous. He even suggested the possibility of testing FSD through a monthly subscription. Tesla has not provided a specific explanation for the price reduction.
Analyst’s Perspective: Canaccord analyst George Gianarikas suggested that the price cut may reflect lower-than-expected adoption rates of FSD, and Tesla’s move could be an attempt to accelerate the adoption of its razor-razorblade model. In this analogy, the car represents the razor, and the FSD software serves as the razorblade.
Challenges and Risks: While Tesla has been somewhat secretive about the number of FSD purchases, it was estimated to be around 400,000 during a March investor day, when Tesla had sold approximately four million cars globally. This indicated a take rate of about 10%. To break even on sales at the new, lower price point, Tesla would need to increase its take rate to around 13%. Achieving profitability on gross profit generated from FSD sales would require an even higher take rate, closer to 14%, assuming average software profit margins.
Financial Implications: If the take rate remains unchanged after the price reduction, Tesla could potentially risk approximately $130,000 in gross profit in the final four months of the year. This amount represents slightly over 1% of the gross profit forecasted by Wall Street for the second half of 2023.