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Here's the First Official Look at Tesla's Model Y

By Evan Niu, CFA – Jun 7, 2017 at 7:25PM

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Tesla's lofty valuation depends on the forthcoming crossover SUV.

Most companies' annual shareholder meetings aren't all that exciting. Even fewer use the gatherings as venues to tease future products, but that's precisely what Tesla (TSLA 2.28%) did at its annual meeting yesterday. CEO Elon Musk discussed a wide range of topics, including when the Model 3 configurator will open to reservation holders (late July), and even teased that Tesla would somehow address the fact that current music streaming services' curation algorithms are a little lacking. He even disclosed a potentially hazardous hobby of drinking alcohol, taking prescription drugs, and getting on Twitter.

Tesla also took the opportunity to release the first official teaser image of the Model Y:

Teaser image of Model Y

Image source: Tesla.

Tesla's valuation depends on Model Y

There's been no shortage of third-party renderings that imagine what the Model Y will look like, but this is the first official glimpse. It expectedly looks similar to the Model 3, even though Tesla said on the earnings call last month that Model Y would be built on an entirely different manufacturing platform, an announcement that confounded just about everyone.

The teaser shows an absence of side-view mirrors, which presumably it hopes to replace with cameras. The company had initially tried to replace side-view mirrors with cameras in the Model X but could not overcome regulatory hurdles to do so. Tesla, along with other major automakers, has been lobbying since at least 2014 to get regulatory approval to replace side-view mirrors with cameras, with little to no success. Perhaps they'll make some progress by the time the Model Y launches, which is expected in 2019 or 2020.

As a crossover SUV, the Model Y will be a critical follow-up to Model 3, one that hopes to capture the seemingly insatiable demand among U.S. consumers for crossover SUVs. Through May, year-to-date crossover SUV sales in the U.S. have jumped 9% to nearly 2.1 million, according to Motor Intelligence.

Meanwhile, Tesla's current SUV, the Model X that starts at $82,500, has missed out on some of that booming demand, according to a recent Bloomberg report, citing registration data from IHS Markit. It's true that Model X unit deliveries have continued to climb sequentially, but the Model X is compromised on several levels, and owners often have more problems because of the excessive amount of technology Tesla included in the vehicle. Despite some complaints, though, Tesla still enjoys high customer satisfaction and loyalty rates among Model X buyers.

Tesla also stopped disclosing its combined Model S and Model X order rate last quarter, which prompted some speculation on what management was obfuscating.

That's where the Model Y comes in. Tesla has learned -- and repeatedly acknowledged -- that it made strategic mistakes with the Model X. An affordable crossover SUV that's simpler and easier to manufacture, like the Model 3, not only has the potential to drive a bulk of Tesla's delivery targets but is also utterly critical in justifying the current valuation, which is predicated on the notion that Tesla will make it to the mainstream.

Evan Niu, CFA owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla and Twitter. The Motley Fool has a disclosure policy.

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