Tesla Inc. (TSLA - Get Report) shares traded sharply lower Friday after founder and CEO Elon Musk said a move to offer a cut-down version of its flagship Model 3 sedan will likely result in a first quarter loss, only weeks after telling investors he would turn the clean energy carmaker into the black. Shares ended down 7.8% to $294.79 by Friday's close.
Tesla said Thursday it will offer a $35,000 Model 3 with a reduced driving range of 220 kilometers (132 miles) and a slimmed-down interior. Increasing price points will boost both the range and the top-end speed of the Model 3, the company said, while buyers will be able to receive the new car withing two to four weeks.
Tesla also said it would start shutting down its network of stores and showrooms to focus solely on online sales, a move that, along with the increased delivery costs linked to the new Model 3 sales, will carve into profits for the three months ending in March.
"Given that there was just a lot happening in Q1, and we're taking a lot of one-time charges and there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable in Q1," Musk told journalists on a conference call late Thursday. "But we do think that profitability in Q2 is likely." That view was reiterated in a Securities and Exchange Commission filing Friday.
The Model 3 reduction marks both the first price cut for Tesla and a significant commitment to mass production as it seeks to win new customers in the United States following the expiration of $3,750 in tax credits for clean energy vehicles last year and challenge lower-priced competitor such as Nissan's Leaf and the Chevrolet Bolt.
"That is important, because it is clear that demand for the Model 3 in the U.S. has softened substantially since the beginning of the year. In fairness to Tesla, the company has cut its pricing to the degree necessary to counteract the reduction in the federal EV tax credit," said JMP Securities analyst Joseph Osha. "But we believe that surge of late 2018 demand as buyers rushed to catch the full credit has created a hole in Q1 demand that Tesla is still working to figure out."
It has also created yet another headline controversy for Musk, who is currently embroiled in a spat with the Securities and Exchange Commission over his prolific use of social media.
Musk told investors on January 31 that he was, "at this point ... optimistic about being profitable in Q1. Not by a lot, but I'm optimistic about being profitable in Q1 and for all quarters going forward."
Tesla said in a blog post that its online sales shift would "lower all vehicle prices by about 6% on average, allowing us to achieve the $35,000 Model 3 price point earlier than we expected" and open up channels for new demand.
Musk, however, stuck to his January production forecasts for the Model 3 of between "350,000 and 500,000" and decline to answer how the reduced price would impact margins on its most popular vehicle.
In the January conference call, Musk agreed with one analyst's suggestion that Telsa was targeting a 25% gross margin level "despite introducing the lower-end - or just the standard range Model 3."