New, Less-Expensive Model S Is Looking Like It's a Hit

By Markets Fool.com

In order to meet its aggressive goal of delivering 50,000 vehicles in the second half of 2016, or nearly the same amount of vehicles Tesla Motors (NASDAQ: TSLA) delivered during the entirety of 2015, Model S sales are going to have to pick up again after two quarters of sequential declines. Fortunately, it looks like Tesla has introduced the needed catalyst for its sedan, and just in time for the company's planned production ramp-up: a less-expensive Model S.

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Model S. Image source: Tesla Motors.

A significant catalyst?

Tesla announced its new, cheaper variant of Model S just as it was wrapping up its second quarter. It came with 60 kilowatt hours of battery capacity, along with an extra 10 kilowatt hours of capacity accessible for a fee via an over-the-air software update anytime after delivery. Starting at $66,000, or about $5,000 less than its previous base model, this new entry-level Model S was packed with value and represented an aggressive move for the fast-growing automaker.

But since the new Model S wasn't released until the third month of the second quarter, any orders for the new Model S variant wouldn't be delivered until the Q3; so Q2's delivery numbers didn't include any benefit from demand created by the new Model S. This meant investors didn't get to see how this less-expensive Model S is impacting sales yet.

Thankfully, however, Tesla did offer a small glimpse into how the less-expensive version is resonating with customers. And it turns out the price point is hitting a sweet spot.

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"[O]ne of the reasons we introduced the 60 was we saw more Model 3 demand than we anticipated," Tesla head of global sales and service Jon McNeill said during the company's second-quarter conference call (via a Reuters transcript).

McNeill continued:

And a number of those reservation holders said to us we would love to be in a Tesla today if you could provide a more affordable version of the Model S. Our battery technology allows us to do that. And so we introduced the 60 and that's generated demand out of a new market segment. It is reaching down into that Model 3 reservation territory. And portends really good things for future Model 3 demand. But, it has opened up a very nice segment for us for Model S.

For some context, Tesla garnered 373,000 deposit-backed reservations for its Model 3 within two weeks of the vehicle's unveiling in March. So, even a small portion of this market could be a significant driver for Model S.

Far from low-margin territory

For any investors worried incremental sales of Tesla's new, less-expensive versions of Model S could drive the company's profit margins significantly lower, there are two reasons this almost certainly won't be the case. First, a $66,000 price point still leaves plenty of room for margin -- especially after options are added. Second, Tesla CEO Elon Musk said during the company's second-quarter earnings call that people are not buying 60s without optioning them up "quite a bit."

"So it ends up having an average sale price like over $80,000," he said.

With these things in mind, it's not surprising Tesla expects its non-GAAP automotive gross profit margin of 21.9% (excluding the impact of zero emission vehicle credits)to continue to improve as the company ramps up production in the second half of the year.

Model X. Image source: Tesla Motors.

Notably, this good news about Tesla's new 60 kWh Model S bodes well for the company's July introduced 60 kWh Model X, or its least-expensive version of its new SUV yet. Together with its new Model S variant, Tesla is setting itself up to hit its aggressive target of 50,000 deliveries during the second half of the year.

But investors will get a better idea how these vehicles are impacting demand when Tesla announces third-quarter results later this year. In the next quarterly update, investors should look for a more detailed update on how Tesla's move to lower price points for its S and X is impacting the electric-car maker's business.

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Daniel Sparks owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.