Tesla, the prominent electric vehicle (EV) manufacturer, has recently faced challenges regarding its demand dynamics, as highlighted by its latest quarterly performance. Despite implementing price reductions to stimulate demand, Tesla’s vehicle lineup is perceived as outdated and overdue for a refresh. The highly anticipated release of the mass-market Model 2 was anticipated to address these issues, but recent reports suggest a potential setback in its development.
According to a Reuters report on Friday, Tesla has purportedly halted work on its affordable car initiative to prioritize the advancement of its robotaxi technology. However, CEO Elon Musk promptly refuted this claim, dismissing it as false. Nevertheless, Musk announced on his social media platform, X, that Tesla intends to unveil its robotaxi on August 8.
This development has added another layer of intrigue to the ongoing Tesla narrative. Should the Reuters report be accurate, it could significantly alter Tesla’s strategic direction moving forward.
Morgan Stanley analyst Adam Jonas regards the Model 2 as pivotal to Tesla’s medium-term growth prospects. He estimates that from fiscal year 2024 through 2030, the Model 2 could contribute over 40% of incremental unit volume for Tesla. By 2030, Jonas predicts that the Model 2 could represent 36% of Tesla’s unit volume, 23% of auto revenue, 17% of total company revenue, and approximately 10% of overall earnings before interest and taxes (EBIT).
Although the Model 2 may not constitute a substantial portion of Tesla’s profit pool, abandoning the initiative could dampen near-term sentiment and prompt investor reassessment.
The decision to suspend work on the Model 2 initiative raises several strategic questions for Tesla. Is Tesla conceding that other EV manufacturers, particularly those in China, have surpassed it in offering affordable EVs? Has Tesla concluded that even a successful Model 2 launch would not significantly impact its competitive position?
Regarding the anticipated robotaxi unveiling, some speculate that it could strengthen the case for Tesla’s full self-driving (FSD) technology. However, Jonas remains skeptical, citing legal and regulatory obstacles that could prolong the timeline for widespread adoption of autonomous driving technology.
Despite these uncertainties, Jonas maintains an optimistic outlook on Tesla, reiterating an Overweight (Buy) rating with a price target of $310. This target implies a potential total return of approximately 88%. However, the broader analyst consensus is more cautious, with a Hold rating based on 19 Holds, 9 Buys, and 7 Sells. The average price target of $196.72 suggests a modest premium of 19% over the next year.
In conclusion, while Tesla’s strategic shifts and ongoing controversies may generate headlines, investors should conduct thorough due diligence before making investment decisions.