Tesla's onslaught of announcements is raising red flags about demand for its cars

Key Points
  • The Model Y launch announcement from Tesla comes days after the company cut prices on other models.
  • The vehicle could have strong demand, but it could also cannibalize demand for the Model 3.
Tesla teases the Model Y.
Source: Tesla.

Tesla's onslaught of announcements is starting to make analysts wonder if customers are losing interest in its cars.

CEO Elon Musk said Sunday that Tesla's upcoming Model Y crossover vehicle will be unveiled on March 14. While it could be a great vehicle with high demand, RBC analyst Joseph Spak said the timing of the announcement raises concerns. Musk tweeted the news days after the company made considerable price cuts to its other models and said Tesla needs to close some showrooms and cut sales staff. It also spent nearly $1 billion paying off debt last week.

On Thursday, Tesla unveiled its long-awaited $35,000 Model 3, reduced prices on upgrades to its Autopilot automated driver assistance system and made significant price cuts to its Model S and Model X vehicles after saying it will only sell its vehicles online to lower costs. Its shares fell nearly 8 percent Friday and slid by another 3 percent in midday trading Monday.

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All of this suggests Tesla is rushing to strengthen demand for its products, which could be waning in the U.S., Europe and China, Spak told investors in a research note Sunday.

"A Model Y announcement so shortly after the $35k [Model 3] suggests that consumer reaction toward the $35k Model 3 may not have been as strong as the company had hoped," Spak said. "We believe there has been a fall- off in U.S. demand and softer than expected demand in Europe/China." The price cuts on Tesla's three models, the X, S and 3, backs up the idea that demand has softened, he added.

It is important to note that Musk has teased mid-March as a possible date for the unveiling of the Model Y before. He had said as far back as May 2018 that the Y could be revealed on March 15. "I just made that up, because the Ides of March sounded good," Musk said on Twitter.

Musk tweet

Investors have long worried about whether Tesla can sustain interest in its cars at their current high prices. Tesla is somewhat boxed in by the need to keep prices high enough to recoup its massive investments and turn a profit, while keeping them low enough to compete with bigger manufacturers that are pouring money into electric vehicles.

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High prices weren't as much of an issue when Tesla was making premium electric vehicles, such as the Model S and Model X. But the Model 3 is meant for the mass market. Up through the end of 2018, Tesla's sales were bolstered by a federal tax credit of $7,500 for electric car buyers. But that credit was halved starting Jan. 1, and some have questioned whether that will hurt demand.

On the positive side, the Model Y launch a few weeks before the quarter closes could bring a fresh infusion of cash into the company from customer deposits. Musk told reporters Friday that he was doubtful Tesla will turn a profit in the first quarter. The company also spent $920 million paying off debt Friday.

More than 400,000 customers shelled out $1,000 each to reserve a Model 3 in 2016, according to Tesla's count, which boosted the company's cash by $400 million that year. Interest in the Model Y, given that it will compete in the highly popular crossover segment, may yield a similar benefit to its bottom line, analysts said.

The downside of that is that the new Model Y could steal demand away from the Model 3, which Tesla has spent years and piles of cash trying to produce in high volume, analysts said.

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