One of the most closely followed stocks on Wall Street is Tesla (TSLA 14.58%). The electric vehicle (EV) pioneer has earned a market-leading position in the automobile industry thanks to relentless innovation and a loyal customer base. Moreover, the influence Tesla has within the auto industry cannot be overstated. Over the last several years, the EV space has welcomed a plethora of new entrants such as Rivian Automotive, Polestar, Lucid Group, and more.
With this rise in competition, Tesla has been forced to show its hand. Over the last year, the company has resorted to aggressive price cuts in order to maintain its market position and combat a two-way battle from increased competition and macroeconomic challenges such as inflation. While the strategy appears to be working, it's clear that Tesla needs to do more. After all, the EV market is still fairly nascent and Tesla's starting price tag upward of $40,000 could be considered a luxury purchase.
Nonetheless, a few weeks ago it was revealed that Tesla has a new model in the works -- and this could finally be the draw that causes the competition to fold. The best part about this development is that it doesn't seem to be garnering typical levels of media attention when it comes to Tesla, making now an interesting time to build around a long-term position.
Tesla's new model
One of the longest-running Tesla bulls is wealth manager Ron Baron. Baron recently sat down with CNBC to talk about all things Tesla, from its battery technology to autonomous driving ambitions. However, during this particular segment, Baron revealed a little tidbit that investors have long been suspicious about. More specifically, he shed some light into Tesla's vision of a more affordable EV.
So what?
Tesla's lower-end models can sell for nearly $45,000. And just like with any car manufacturer, the more specs that you opt for in your Tesla, the more expensive it becomes. While car ownership in general can be costly, EVs seem to exist in an entirely different orbit. Replacing hardware or battery parts in an EV is a bit more challenging than getting an oil change or having a mechanic check your breaks. For this reason, one of the biggest drawbacks of purchasing an EV is the total cost of ownership.
Per Baron's interview on CNBC, Tesla is reportedly working on a 25,000 euro (about $27,250) vehicle in Germany -- its most affordable option yet. Tesla's unconventional CEO, Elon Musk, has been dropping hints about a lower-cost vehicle for years. This move by Tesla makes a ton of sense.
First, a lower tier price option immediately provides Tesla with more optionality and commercial appeal. What I mean by that is a lower price point will likely result in more people at least considering owning a Tesla. By broadening its base of potential buyers, Tesla is effectively acquiring more market share. Stated differently, some buyers will gravitate toward Tesla before any other EV manufacturer purely because of this newfound affordability.
Additionally, by creating a new model that is specifically marketed as a more affordable option relative to Tesla's other vehicles, the company should (in theory) be able to reduce its price cuts. By doing so, Tesla's average revenue per vehicle should tick up, thereby spurring a return to accelerating top-line growth. More importantly, the company's gross margin per car should increase as well, which will bolster Tesla's already massive pile of free cash flow and continue allowing the company to invest in other growth areas.
Finally, should the $28,000 vehicle prove successful in Europe, it's only a matter of time before Musk brings the affordable option worldwide.
Image source: Getty Images.
What should investors expect?
The biggest variable surrounding the new Tesla model is the timeline. Baron alluded that production could begin sometime in 2024. Assuming this is accurate, it's reasonable to believe that Tesla could begin selling the car by 2025. To be candid, my personal view is that this timeline is a bit aggressive. While Wall Street has picked many gripes with Musk over the years, perhaps the biggest revolves around ambitious release dates for some products and services. While Tesla has done an amazing job pushing EV adoption forward, the company has a history of missing deadlines.
As an investor in Tesla, I am happy just to know that the company is finally developing a lower-priced model. I would not buy Tesla stock today expecting that this new car becomes a billion-dollar revenue stream within the next 12 months or so. As I've written about previously, Tesla has a lot of exciting potential catalysts -- and this new car is just another item on its growing list.
With that said, long-term investors should seriously consider dollar-cost averaging more shares right now. I would not get too hung up on when the lower-cost vehicle will be commercially available just yet. Instead, I'd take advantage of the recent sentiment surrounding Tesla stock and nibble on some shares with the plan to hold long term. Missed deadlines or not, the chart above shows that Tesla stock has been incredible to own for patient investors.
