Tesla Hikes Car Prices amid Chaos but Investors Shouldn’t Be Alarmed

Journalist:
Joseph Young @iamjosephyoung
March 11, 2019

After it was revealed that Tesla owes $1.6 billion in lease obligations at premium outlets, malls, and prime locations, the company has decided to leave many of its stores open.

The Tesla team said in an official statement:

Last month, we announced that we would be winding down many of our stores and moving to online-only sales in order to pass the savings along to our customers.

Over the past two weeks we have been closely evaluating every single Tesla retail location, and we have decided to keep significantly more stores open than previously announced as we continue to evaluate them over the course of several months.

Tesla has already shut down 10 percent of its physical stores nationwide but is reconsidering the planned closure of 20 percent of the remaining stores in the months to come.

Tesla is Raising Car Prices by 3%, But It Shouldn’t Concern Investors

Analysts have criticized the instability of the decisions Tesla have made in recent years as the company gears towards profitability and financial stability.

In February 2018, Tesla said that it plans to expand stores throughout the U.S. to increase the visibility of the brand and the demand for its products.

However, in a complete 180 change, Tesla said last month that it will close most of its stores and shift to online sales.

The abrupt change in the strategy of Tesla worried investors and strategists, forcing several investment firms to pull out of their positions in the Tesla stock.

Lake Ave Financial CEO Alex Chalekian said:

It pains me to say this, since I really love the company, but we have sold our position in Tesla for our advisory clients. I believe that the decision to close retail stores is a bad one and points to the weakness in sales and financial strength of the company.

Barclays analysts echoed a similar sentiment, adding that the closure of retail stores could remove the aura of Tesla as the Apple of the auto industry, stating that removing its retail stores at prime locations could hurt the visibility of the brand.

On March 10, CCN reported that it would cost Tesla about $1.6 billion to pull out from all of its lease obligations in the U.S., contracts that last until 2023.

Given the current balance sheet of the company, spending over a billion dollars could relieve the company of long-term expenses but pressure the company to acquire more debt in the months to come.

As such, even at the risk of increasing the prices of its vehicles by 3 percent, Tesla decided to leave many of its stores open at least for the foreseeable future.

Tesla shutting down 10 to 30 percent of its stores and remaining the majority of locations open presents an adequate balance of cost reduction and an overall decline in the pricing of its products to appeal to a larger market.

Important Key That Makes the Decision Good

The key in the decision of Tesla that could actually fuel the confidence of investors in the near-term is the pricing of the Model 3.

While other vehicles will see a slight increase in pricing by 3 percent, the price of the Model 3 at $35,000 will remain the same.

“Potential Tesla owners will have a week to place their order before prices rise, so current prices are valid until March 18th. There will be no price increase to the $35,000 Model 3. The price increases will only apply to the more expensive variants of Model 3, as well as Model S and X,” the Tesla team said.

Ultimately, with minimal store closure, Tesla has been able to achieve a $35,000 price tag for its flagship product to compete against conventional car makers and establish a solid step towards financial stability.

Joseph Young @iamjosephyoung

Hong Kong-Based Finance Analyst. Contributing regularly to CCN and Hacked. Providing unique insights into the fintech space since 2012.