Published on November 25th, 2019 | by Frugal Moogal0
Tesla [TSLA] FUD: $100 Preorders
November 25th, 2019 by Frugal Moogal
The goal of this series is to examine current topics being written about Tesla [TSLA] that appear to be stirring up “Fear, Uncertainty, and Doubt” (or FUD). The plan is to try to provide reasonable analysis about the validity of the claims. I generally do not link to the articles that “inspire” me to write this, as I do not wish to reward analysis I feel is poor with increased traffic. However, I will freely admit that my analysis may contain incorrect assumptions, and will do my best to acknowledge them in future articles.
The Cybertruck has been selling. A lot. As of this writing …
— Elon Musk (@elonmusk) November 25, 2019
… but, those pre-orders only cost $100, and they are fully refundable, leading many to question if they will transfer into orders.
To get straight to the point, I think I understand why Tesla chose $100, and I love it.
[Editor’s note: Frugal usually puts in a boilerplate about his stock position here, but I’m moving that to the bottom of articles to get to the story more quickly. Skip down to the bottom if you want to read about his position in the company before reading the article.]
Cybertruck Reservation Just $100
At this point, we’ve all seen it — the Tesla Cybertruck reservation is just $100, and it’s also refundable! Therefore, many argue that very few will go through with the purchase, especially compared to what we saw with the $1,000 reservation cost for the Model 3.
And you know what? Maybe that’s true!
I got in the Model 3 game late. We bought a used Nissan Leaf to track cost savings. Turned out, it was saving us well over $100 a month in fuel costs alone. Finding this out made me want a long-range electric, and I didn’t want the cost of a Model S or X, so waiting for a Model 3 it was. I put a reservation on a Model 3, figuring if something better came along in the meantime, I’d get my reservation back. I’m sure many others felt similarly.
I’ve never seen it officially stated anywhere, but I believe the Model 3 cancellation rate was 33% at a minimum and perhaps higher due to production delays, initial cost, and fact that once things got cranking, the pre-order spots seemed to matter little.
Regardless of cost, putting any money down shows an interest in the product.
I believe that Tesla has solved the majority of its manufacturing issues — the Chinese Gigafactory and Model Y ramp are what I care about (Semi and Roadster I think are delayed for some sort of new battery technology). If that’s true, I think a faster production ramp will offset the cheaper reservation cost, and they will not suffer significantly higher dropout rate. Even if it is higher, I am not concerned, so long as they can sell them as quickly as they make them.
I think there was a big reason that Tesla chose $100 instead of a higher rate, however, and that was because this release was all about exuding confidence. Long before the reveal, Musk warned that it’s not going to be for everyone. At the event, Tesla announced specs and pricing that seem far ahead of the industry. And, you could reserve one for very little money.
My first major takeaway was and still is that Tesla is so confident in its business now that it didn’t need this to be a hit.
Secondly, there was a ton of FUD based around Tesla reservations in the past. People yelled that Model 3 reservations cost so much because Tesla needed interest-free loans! The Roadster was unveiled at the same time as the Semi because Tesla needs money so badly!
And you know what? Maybe Tesla did. But, with a $100 reservation price, Tesla is saying it doesn’t need a cash boost any more.
That hasn’t stopped a few articles suggesting Tesla just did this because it needed more interest-free loans, and the Cybertruck allowed Tesla to get $20 million worth! Perhaps those authors forgot Tesla’s third quarter revenues of $6.3 billion. That’s about $70,000,000 per day. This $20 million “loan” is comparable to 0.3% of Tesla’s revenue last quarter. It’s immaterial.
And that’s the point. Tesla doesn’t need the money. It needed to gauge interest in a product that there is nothing else like. Tesla is guaranteed to need to spend more than $20 million to spool up production for the Cybertruck.
By keeping the reservation cost so low, Tesla has more or less proven that it doesn’t need pre-order cash to spool up production.
First of all, I’m making a change that I feel like I need to explain.
I am changing my boilerplate to eliminate share quantity. Depending on my research, I may add to my position. I don’t want the story of if or how many shares I added to my portfolio to overshadow my analysis.
You might assume this means I added to my Tesla position recently, and that is correct, although it is less than 10% of my portfolio. I cannot confirm that it will remain so based on market fluctuations and my own personal decisions. I will state that Tesla is extremely abnormal in my portfolio, as it is the only non-dividend stock I own other than a position in Kiwibox.com that is worth less than ten cents (no kidding).
As a rule of thumb, I am a long-term investor, and I have never sold a stock within a year of purchasing it, and I do not intend to.
Anyway, here’s the updated boilerplate:
“I am a Tesla shareholder who has purchased shares within the preceding 12 months. Research I do for articles including this article may influence me to increase or decrease stock positions. However, I will not do so within 48 hours after any article where I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.”
Along with that, please do feel free to challenge my findings in the comments, and please know that I am definitely not perfect. See: Kiwibox.
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