Tesla Motors stock plunged on Friday and just kept on falling until Tuesday, and now the automaker’s share price seems to have stabilized somewhat. One of the biggest factors affecting the stock is plummeting oil prices, which have Wall Street all in a tizzy about Tesla’s sales and worrying that they will slump as well.
However, there’s one argument that keeps popping up among Tesla bulls. It’s pretty obvious that Tesla’s sales don’t have anything to do with oil prices—despite the fact that the company only makes all-electric vehicles.
Are the Tesla bulls right about oil prices?
Forbes contributor Adam Hartung is the latest to present this argument, and he’s not wrong, at least not right now. Tesla is firmly planted in the luxury auto market, and its customers aren’t typical consumers. They have plenty of cash and care more about the sports car-like quality of the Model S than they do about saving money on gas.
After all, why do you think gas-guzzling SUVs are popular with celebrities? Clearly they care little about saving a few bucks on gas, and why would they? They’re drowning in cash. It’s obvious something else is driving their decision what kind of vehicle to buy, and typically, it’s all about style—something Tesla’s Model S has in spades.
A buying opportunity for Tesla stock?
Hartung believes the recent pullback in Tesla’s share price offers a “tremendous buying opportunity” for investors. There’s virtually no disagreement about his first argument for why Tesla stock is a Buy. The Model S has won multiple awards and gets rave reviews from consumers. It’s fun to drive and, as Morgan Stanley analyst Adam Jonas has said in the past, people like the car because it’s a great car. It just happens to be an all-electric car.
Second, he points out that gas prices aren’t low in all parts of the world. In Hong Kong, drivers paid a steep $8.50 per gallon as recently as Dec. 31. And third, it’s very unlikely oil prices will stay as low as they are forever.
Tesla plans Model 3
One area in which Tesla’s future is very unknown is whether it will be successful in bringing an electric car into the mass auto market. Granted, we’re still years away from the release of Tesla’s Model 3, and gas prices will probably be through the roof again by then Tesla will have to price the car perfectly.
So what does a perfect price on a Tesla for the mass market look like? For one thing, gas prices will likely be a much bigger consideration for the average consumer than they are for the ultra-rich. However, hybrid sales show that some consumers don’t mind paying extra for a hybrid vehicle even though they will have to drive it many years before they even start saving money on gas, simply because hybrid vehicles are now priced at a significant premium to gasoline-powered cars.
In their early days, hybrids did offer savings on gasoline, but that just isn’t the case anymore, except for those who drive them until the wheels fall off because they don’t mind waiting for years to see savings from their purchase.
Gas prices may affect Tesla’s future
It’s likely that Tesla’s Model 3 will have the same pricing issue, which means success of the car may be limited, particularly if the price is significantly higher than comparable gasoline-powered cars. In other words, falling gas prices may not be harming Tesla’s sales right now, but they could have a major impact on sales of the Model 3 when it hits the market a few years from now.
Unless, of course, gas prices balloon between now and then (and they probably will) and stay there. The extent of the gas price increase though is what will at least partially dictate how much Tesla can safely charge for the Model 3 and still convince consumers that it’s worth the extra money. As Hartung pointed out though, Apple has shown that consumers are willing to pay more for a better experience, so Tesla will probably have that going for it as well. But any car that targets the mass market is going to have to be priced just right—no matter how cool it is.
Shares of Tesla Motors edged upward by less than 1% during regular trading hours today.