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Tesla Motors Inc (TSLA) Gen III Car May Close The Cost Premium Gap

Tesla Motors Inc (TSLA)’s Generation III vehicle just might be able to close the premium gap which exists between traditional cars and electric vehicles. Deutsche Bank analysts believe it’s all about the technology and that Tesla is years ahead of others.

Tesla Motors Inc (NASDAQ:TSLA) said earlier this year that it was working on a Generation III mass market vehicle, and right away the bears jumped on the company’s claims. They didn’t think the numbers would enable Tesla to build such a vehicle and make it profitable, but that’s changing.

Tesla Motors

This week Deutsche Bank analysts Dan Galves, Rod Lache, Mike Levin and Patrick Nolan gave the company a major upgrade from Hold to Buy, based on a number of factors. One of them was their analysis of whether the automaker could indeed make a cost-effective mass market vehicle. Wedbush analysts did a similar analysis about a month ago and came up with the same conclusion as Deutsche Bank: it can be achieved.
Tesla to take “another huge leap forward”

Analysts at Deutsche Bank looked at the cost compared to the profit of Tesla Motors Inc (NASDAQ:TSLA)’s proposed mass market vehicle, and they think it will entail a major leap forward. They see the automaker being able to fully close the cost premium which exists on electric vehicles over traditional internal combustion engine vehicles. In fact, they see the company being able to do this while still maintaining that 25 percent gross margin promised earlier this year—something other analysts have been skeptical that the company could do.

The analysts compared the Tesla Motors Inc (NASDAQ:TSLA) Generation III with the cost premium gap of the BMW 3-Series segment. They said all Tesla needs is a 5 percent share of its addressable market—which would be 200,000 units, including both the Model S and Model X—in order to get a gross margin of around 28 percent on average. They note that even if research and development and SG&A costs almost triple from their current levels, they would be within the 8 percent of sales range, which would imply 20 percent margins.

As a result, the Generation III vehicle will give Tesla Motors Inc (NASDAQ:TSLA) access to a mark that’s about double the size of the luxury market, which the company currently addresses. The analysts say if Tesla Motors Inc (NASDAQ:TSLA) is indeed able to avoid having to tack on a cost premium to its Gen III vehicle, then it “should be able to control higher share” in the mass market.
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