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I'm Not the Only One Who Thinks Toyota and Honda Should Be Scared of Tesla's Model 3

By Evan Niu, CFA - Mar 20, 2016 at 9:00AM

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Model 3 will also appeal to the non-luxury sedan market.

Image source: Tesla.

Tesla Motors (TSLA 4.53%) is very much a battleground stock these days. The company is sure to elicit a wide range of investor opinions spanning the entire spectrum. A lot of the company's future prospects hinge on the success or failure of the forthcoming Model 3, set to be unveiled at the end of the month. The Model 3 represents Tesla's shot at the mainstream market, starting at $35,000 before incentives.

On paper, that would position Model 3 in the entry-level luxury sedan market, which moved about 500,000 units in the U.S. last year. However, I believe that the Model 3's market opportunity is actually significantly larger, considering the company's demonstrated ability to attract buyers from lower-end markets.

I'm not the only one.

Word on the Street
On Friday, Bernstein put out a research note (via Barron's) discussing the Model 3's prospects. The bullish tone of the analysts was partially what drove Tesla shares higher that day. The analysts believe that Model 3 will serve as a sort of wake-up call for the auto industry, accelerating industrywide investments in EV technology. Incumbent automakers have already been developing EVs for a few years now, but Model 3 could dramatically increase those commitments.

Image source: Honda.

Furthermore, Bernstein doesn't think Model 3 will only compete with other luxury cars such as the BMW 5 Series or Audi A6. Honda Motor (HMC 0.80%) and Toyota (TM 0.99%) had better watch out, too:

"But with a mid-priced addition to Tesla's product mix, the company will no longer be competing just with the BMW 5- series and Audi A6. It will be competing with the Honda Accord and Toyota Camry."

That echoes my own sentiments precisely:

"All of a sudden, we're now talking about Model 3 potentially competing with the Camry and Honda Accord and other non-luxury sedans. Now that is a huge market (Camry and Accord alone sold a combined 784,742 vehicles in the U.S. in 2015)."

This is a massive market segment that we're talking about.

T-minus 11 days
The Accord and Camry have been brand-defining models for Honda and Toyota for years, thanks to a wide range of factors including reliability, affordability, and value retention. A big unknown is how Model 3 will score in these departments.

Tesla's Model S has already been putting pressure on Toyota's Prius, thanks to a large overlap in environmentally conscious customers. Meanwhile, Honda has been struggling with a variety of quality issues (Honda had to recall its brand new 2016 Civic just months after launch due to a major engine problem), and recently appointed CEO Takahiro Hachigo has vowed to fix some organizational problems within the company.

March 31 can't come soon enough.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$737.12 (4.53%) $31.91
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
TM
$159.08 (0.99%) $1.56
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
HMC
$25.04 (0.80%) $0.20

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