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How Will The Model 3 Launch Affect Tesla (TSLA) Stock?

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Today is Christmas in March for Tesla Motors (TSLA - Free Report) fans. After a year and a half long period of anticipation, the electric car giant is finally set to unveil its smaller, cheaper Model 3 sedan tonight.

This launch has people excited, and interested buyers have been lining up outside Tesla dealerships in hopes of getting on the reservation list. Previous Tesla owners get first dibs on the Model 3, but for just $1,000 down, drivers could get their name on the list on a first-come-first-serve basis as the dealerships opened today.

It’s also an important day for Tesla investors, as it marks the company’s first venture into a lower-cost market that could open up a valuable new revenue stream. The stock seems to be riding the hype, as shares of TSLA are up nearly 2.5% in morning trading.

We all know that hype can make stocks move, but the real question here is simple: is the Model 3 actually a game changer, and will it continue to boost this stock long-term? In order to find an answer, we need to look at some other questions regarding the Model 3.

The Price

Elon Musk and Tesla have been pitching the Model 3 as a sub-$30,000 sedan for over a year now. That number is based off a $35,000 base price and a federal tax credit that could get the starting cost of the Model 3 down to about $27,500.

This price is important for Tesla to be at, as it keeps the Model 3 right in the range of General Motors’ (GM - Free Report) Chevy Bolt and the Nissan (NSANY - Free Report) Leaf.

While this sounds good on paper, the federal tax credit that Tesla is banking on won’t last forever. The credit was intended to encourage automakers to get started on the move towards electric vehicles by helping with some of the forward costs. It only applies to the first 200,000 electric vehicles that the company sells in the U.S.

Tesla only started releasing regional sales numbers in 2014, and since then it has sold about 42,000 vehicles in America. Add in the 90,000 Model S and Model X cars that Tesla projects to sell this year, and the company is already well over halfway to the end of the credit.

While that would still give Tesla about 70,000-80,000 cars to sell under the credit, the Model 3 won’t actually begin production until the end of 2017. By then, Tesla’s tax credits will be used up and the plan will begin to roll back over the next 12 months.

Without a tax credit, this puts the Model 3 in the higher end of the range of its competition, and it could affect long-term sales after this initial hype wears off.

Company Financials

As mentioned above, the Model 3 is exciting for investors because it could open the company up to a large section of the market and bring in new revenue. Nevertheless, it’s important to update ourselves on Tesla’s current financial situation.

Despite increasing sales, Tesla remains a loss-making company. In each quarter of 2015, Tesla reported higher net losses compared to the corresponding quarters in 2014. Additionally, Elon Musk stated last year that the company may not achieve profits until the Model 3 hits full-scale production in 2020. It goes without saying that four more years of losses won’t make Wall Street too happy.

Furthermore, Tesla’s operating expenses are expected to rise by 20% due to development costs related to the Model 3. With rising expenses and growing losses, Tesla’s cash has slipped. The company’s cash and cash equivalents declined to $1.20 billion at the end of 2015 from $1.91 billion a year prior.

Bottom Line

So, how will the Model 3 affect Tesla’s stock price? Well, for now, expect it to ride the hype. With potential buyers literally lining up to reserve a Model 3, there should be a big enough initial wave to keep the market interested, so long as tonight’s reveal doesn’t come with any unexpected bad surprises.

Nevertheless, there remains some serious questions about Tesla’s long-term strategy. Musk himself has said the company won’t turn a profit until 2020, and that’s probably based on the most optimistic expectations for the Model 3.

Simply put, many hopeful investors thought that the lower-cost Model 3 would finally be Tesla’s ticket out of the red, but now it looks like things won’t be that easy.

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