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Tesla (TSLA) to Discontinue Model S 60 Sale from April

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Tesla, Inc. (TSLA - Free Report) has recently mailed its customers informing them of the discontinuation of the sale of the entry level Model S vehicle, according to sources. The company has decided to remove the Model S 60 and 60D from its lineup. The last day to buy the 60 kWh version has been set at Apr 16, 2017. Post the date, the entry level Model S sedan will be S 75 and 75D, priced $6,500 higher. Late last year, the company had raised the price of its Model S vehicles by $2,000.

A Cheaper Model S

Tesla had introduced Model S 60 and 60D versions last year. The cheaper version was introduced as the company experienced a higher-than-expected demand for Model 3 as well as immediate demand for a more affordable Model S. These versions were introduced to boost sales which in turn would encourage the adoption of electric cars. The Model S 60 kWh version has the same battery as the 75 kWh version. However, a software limits the battery usage to 80%. Customers have the option to upgrade the battery to utilize the entire capacity by unlocking the software for $9,500.

During the introduction of this version, Tesla had expected demand for Model S to increase and subsequently the customers would also pay for unlocking of the 60 kWh version for the addition 15 kWh. The company expected gross margins for the sale of the locked version to be 15−20%. However, if customers unlocked the software, the margin was expected to rise to the mid-20% range.

Tesla has claimed that most customers who purchased the Model S 60 kWh version unlocked the software to 75 kWh. To ease the ordering process for consumers, the company has decided to eliminate the 60 kWh version. Another reason for the removal of the version from the company’s vehicle lineup could also be to boost the gross margins if the rate of upgradation fell short of expectations.

Model 3 on the Cards

The announcement comes at a time when Tesla is preparing to begin production of the Model 3, which will be the company’s most affordable vehicle. The price of the model will be less than half of the new entry level Model S. Model 3 is expected to have a battery smaller than 60 kWh but versions offering higher performance will be priced more.

The discontinuation of the 60 kWh Model S also widens the gap between the two models, which would differentiate Model S as a higher-end model. Moreover, customers would be less confused about the model choice owing to a significant price difference between the two.

A Rerun of Events

Earlier, Tesla had taken similar decisions on its Model X SUV. The company introduced a cheaper 60 kWh Model X version, with limited battery usage from the 75 kWh by a software which could be upgraded. However, four months after the introduction of the version it was discontinued.

The removal of the more affordable Model X increased the base price of the vehicle from $74,000 to $88,800 per unit.

Performance

Tesla has outperformed the Zacks categorized Auto Manufacturers-Domestic industry over the last three months. During the period, Tesla gained 26.1% while the industry witnessed a 6.8% rise. During this period the company announced a number of expansion measures, including its decision to venture into the Middle East. Moreover, the company has remained on track with the production schedule for Model 3.

Zacks Rank & Key Picks

Tesla currently carries a Zacks Rank #3 (Hold).

Better-ranked companies in the auto space include Lear Corporation (LEA - Free Report) , Honda Motor Co., Ltd (HMC - Free Report) and American Axle & Manufacturing Holdings, Inc. (AXL - Free Report) .

Lear sports a Zacks Rank #1 (Strong Buy) and has an expected long-term growth rate of 8.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Honda, carrying a Zacks Rank #2 (Buy), has an expected long-term growth rate of 26%.

American Axle, carrying a Zacks Rank #2, has an expected long-term growth rate of 8.1%.

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