Tesla Motors: Want Our Car? Bring More Money

Shares of Tesla Motors (NASDAQ: TSLA  ) were up big on Monday on news that the company's first-quarter deliveries were better than expected – and that the company was now able to forecast a profit as a result.

That was a strong sign that Tesla continues to execute very well on its ambitious – some might say audacious – business plan.

But lost in the excitement over Tesla's impending profit was this bit of eyebrow-raising news: It just got a lot more expensive to buy one of Tesla's hot electric sedans.

Remember that entry-level Tesla? It isn't happening
Tesla announced on Monday that the entry-level version of the company's Model S sedan, priced at $52,400 (after a $7500 Federal tax credit) wouldn't enter production. None have been made so far.

The issue, Tesla said, is lack of demand. Only 4% of buyers had chosen the basic model, which was to come with a 40 kWh battery pack giving about 160 miles of range. Those buyers will instead be given a 60 kWh model fitted with software limiting the car's range. Tesla says that it will be willing to "upgrade" those cars by removing the range limit at any time, presumably for a hefty fee.

That's actually not a bad deal for those buyers. The 60 kWh models have better acceleration than the 40 kWh versions were set to have, and the possibility of an upgrade could be a helpful feature when selling the car or trading it in later on.

But the fact that Tesla isn't actually going to build the entry-level Model S kind of undermines some of its promise of electric cars for all, as it was originally presented.

A builder of luxury cars, at luxury car prices
Around the time of Tesla's IPO, much was made of the fact that the Model S would start at "under $50,000" (the 40 kWh model's original price was initially $49,900 after the tax credit). This was to be a relatively affordable mass-market product, we were told, not just a bauble for well-heeled gadget geeks.

Of course, the Model S has turned out to be more than a bauble – it's a fun to drive, luxury sport sedan that happens to be electric. And it's now unequivocally priced like a luxury sedan: At $62,400 (again, after that tax credit), the entry-level 60 kWh Model S is now over $10,000 more expensive than the original base model, and over $10,00 more expensive than entry-level versions of the midsized Mercedes-Benz E Class.

Is this really what Tesla promised?
I can't blame Tesla for making the business decision to focus on what are surely higher-margin models. If the company is to have any chance of delivering on the lofty profit hopes built into its very high stock price, it will need to squeeze as much profit out of every sale as it can.

But Tesla got a $465 million low-interest loan from the U.S. government in 2009 to make "mass-market electric cars", or so we heard at the time. At least for now, this decision means those "mass-market" cars are going to be more exclusive than we'd thought.

Worried about Tesla?
Near-faultless execution has led Tesla Motors to the brink of success, but the road ahead remains a hard one. Despite progress, a looming question remains: Will Tesla be able to fend off its big-name competitors? The Motley Fool answers this question and more in our most in-depth Tesla research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.


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