This week, Tesla (NASDAQ: TSLA) finally released the Cybertruck at its event on November 30. Some analysts think that cancelling the product altogether will boost the share price. Meanwhile, others — like Cathie Wood — think the Tesla share price will go up due to investors’ optimism.
To better understand, let’s look at the reasons for both sides and break down the numbers.
Why it could hurt the share price
A key reason for the pessimism came from Elon Musk himself. He admitted that the Cybertruck would take a financial toll on Tesla, be hard to scale for production, and won’t be cash flow positive until 2025.
In two years, Musk projects that the company can begin mass producing the Cybertruck at 250,000 units. Analysts estimate the price to be around $60,990. With two million pre-orders of the Cybertruck already, this means $15.2bn in revenue in 2025. Not bad. However, a few things might shatter this dream.
First, the car was projected to cost only $39,000 when unveiled in 2019. It received much acclaim because it would cost $10,000 less than the most popular pickup truck (the Ford F150) while being significantly more modern. However, Tesla will likely release the Cybertruck at around $60,990 because of rising material costs. Its direct competitors have also been forced to price their trucks at around the same price.
Moreover, Musk has repeatedly stressed that it would be tough to scale production, since the Cybertruck is so advanced that the manufacturing process will be very different from its production of saloons. Overall, both the demand and supply of Cybertrucks are in jeopardy.
In addition, Tesla’s free cash flow — which is the key number used to value companies — has already declined due to the price cuts and operating expenses from the Cybertruck and AI, resulting in earnings decreasing by 44% year on year. With even more investment needed to scale production of the Cybertruck, it will continue to decrease free cash flow and I believe worsen the valuation and sentiment in the short term.
Why it could boost the share price
However, the excitement around the Cybertruck itself could lift the shares higher. When Tesla released the Model Y in 2020, the hype around the company also led to higher sales of the Model 3.
Most importantly, despite the initial high prices, management will likely be able to cut costs down the line. We can’t forget that Tesla still has the highest margins in the industry due to Musk’s genius. Its production process involves fewer parts and is more streamlined than any other car company.
Finally, Tesla has already established itself as a premium brand. Many of the two million who pre-ordered will still be eager to purchase the Cybertruck.
My verdict
However, considering that Tesla’s price cuts haven’t been effective in driving sales, the company has more fundamental problems to deal with than the Cybertruck. Even though the truck could turn out to be a jewel in the crown for Tesla, I believe that the cash burn will only worsen investor sentiment.
The Cybertruck release will likely do little in the short term to boost Tesla shares, but in a few years could pan out to increase its share price when it starts making money.
