Tesla's new crossover stirs worry it will crimp Model 3 demand

Tesla Inc. (TSLA.O) will soon unveil its Model Y crossover vehicle, and that’s prompting concerns about a potential cannibalization of sales at a time when investors are already worried about demand for the company’s cars.

Elon Musk on Sunday tweeted that the Model Y event will be held on March 14 at Tesla’s Los Angeles design studio, adding that since the car will be about 10 per cent bigger than Model 3, it would cost about that much more and have slightly less battery range.

“While we suspect this could be a very good (and in-demand) product, we view the timing of the announcement as more fodder for the bears vs being a positive catalyst for the stock,” RBC Capital Markets analyst Joseph Spak wrote in a note to clients. With the consumer preference in the U.S. moving away from sedans to larger vehicles, announcing Model Y could also hurt demand for Model 3. “We had thought the company would unveil the vehicle closer to start of production to avoid likely cannibalization. Now, that risk seems greater,” Spak added.

Although the design unveiling comes in two weeks, the Model Y won’t be available to customers until much later. Baird analyst Ben Kallo doesn’t expect the car to be available for more than 18 months, and sees that potentially mitigating the risk of cannibalization.

“We think the SUV/CUV market is larger than sedan and growing more quickly in the United States, and we think the introduction of a more competitively-price[d] vehicle could drive higher sales and share gain,” Kallo wrote in a note.

Tesla shares just had a manic week, swinging from a low of about US$289 to a high of US$320, as Musk tussled with the U.S. Securities and Exchange Commission, said he didn’t expect Tesla to turn a profit in the first quarter and debuted a US$35,000 version of the Model 3. The stock rose 1.2 per cent in pre-market trading Monday.

Tesla closed 7.8 per cent lower Friday, a move that financial analytics firm S3 Partners LLC said was driven by long shareholders as bears stuck to their guns.