Tesla Launches New Model 3 Financing Amid Market Challenges

In a move reminiscent of its recent strategy for the Model Y, Tesla has introduced below-market financing rates for select Model 3 sedans in the U.S. This initiative, similar to the one implemented in May for qualifying Model Y purchases, aims to bolster sales in an increasingly challenging automotive market.

Competitive Financing Rates

The newly unveiled financing options for the Model 3 range from a 1.99% APR for a 36-month loan to a 4.99% APR for a 60-month loan. This offer is significantly lower than the previous rates, which hovered around 6.5%. To take advantage of these rates, orders must be placed by June 16. For comparison, the lowest rate offered in May for a qualifying new Model Y order was an impressive 0.99% APR.

Impact on Sales and Projections

Analysts see this promotional offer as a positive development for Tesla’s second-quarter sales volumes. Guggenheim analyst Ronald Jewsikow remarked, “All else equal, this promotion is positive for our below-consensus delivery estimates.” Jewsikow forecasts second-quarter deliveries to reach approximately 409,000 vehicles, in contrast to the Wall Street consensus of around 450,000 cars. This compares to the approximately 466,000 vehicles Tesla delivered in the second quarter of the previous year.

A delivery figure below 466,000 would mark Tesla’s second consecutive year-over-year decline. In the first quarter of 2024, Tesla delivered about 387,000 vehicles, a drop of almost 9% from the previous year.

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Financial Implications of Low Rates

When automakers offer unusually low financing rates, they typically treat it as a price reduction on the manufacturing side. The financing arm of the auto company does not incur losses from these low-rate loans because it borrows money at market rates and earns a spread on its loan book.

Jewsikow estimates that these promotions effectively translate to a discount of $1,200 to $2,000 on the Model 3. While lower prices can boost sales volumes, they can also compress profit margins. Wall Street expects second-quarter operating profit margins to be around 9.6%, up from 5.5% in the first quarter. Investors must weigh the impact of these incentives on profit margins against the potential for increased sales volumes.

Investor Sentiment and Stock Performance

Declining sales and heightened incentives have weighed heavily on investor sentiment this year. Heading into Friday’s trading session, Tesla stock was down about 28% year-to-date.

These factors have also impacted earnings projections. At the start of 2024, Wall Street expected Tesla to earn about $3.81 per share. This estimate has now been revised down to approximately $2.40 per share.

Jewsikow maintains a Sell rating on Tesla shares, with a price target of $126.

Analyst Ratings and Stock Targets

Currently, 21% of analysts covering Tesla rate the stock as Sell, significantly higher than the average Sell-rating ratio of about 7% for S&P 500 companies. About 42% of analysts rate Tesla as a Buy, compared to an average Buy-rating ratio of around 55% for S&P 500 companies.

The average analyst price target for Tesla stock stands at approximately $183 per share. In premarket trading, Tesla shares dipped 0.2% to $177.51, while futures for the S&P 500 and Nasdaq Composite showed minimal movement.

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