Tesla could be preparing to launch a cheaper EV.

Tesla’s shares have performed well over the past two years, outpacing broader equities, despite declines in electric vehicle (EV) deliveries in each of the company’s two most recent fiscal years. Revenue and net income have also been unimpressive over the same period. Recent reports about one of Tesla’s projects suggest a potential path to boost its EV business and improve financial results.

Tesla’s plans to supercharge its business

Reports indicate Tesla is working on a brand-new, cheaper EV model. The plans are described as still in early stages, with production not yet officially started. According to the reports, Tesla would first launch the model in the Chinese market before expanding to other regions.

Why a cheaper model matters

Tesla is facing intensifying competition. In the near term, it is expected to contend with Rivian’s R2, which was set to start shipping to customers in the second quarter, and it will also compete with the Model Y, Tesla’s most popular EV and the single best-selling vehicle in the world, including non-EVs. In addition, Tesla has been outpaced by BYD Company in China.

BYD’s appeal includes a wider range of EV options, including models aimed at price-conscious customers. A cheaper Tesla vehicle could help the company regain market share in China and potentially attract a broader global customer base.

Potential links to higher-margin revenue

The article notes that a larger installed base could support Tesla’s higher-margin recurring revenue from fully self-driving (FSD) subscriptions. It also suggests that more cars on the road would provide additional real-world data to improve the FSD system. In that sense, lower-priced vehicles could create a positive ripple effect beyond the core vehicle business.

Tesla’s broader shift toward robotics

The company’s future is not limited to EVs. Tesla is increasingly focused on developing its humanoid robot, Optimus. The article links this shift to Tesla’s decision to discontinue the Model S and Model X and repurpose space in its Fremont factory in California for robot development.

Stock valuation and key risks

The article concludes that Tesla’s stock is risky. It states that the shares appear to price in a favorable outcome for the humanoid robot project, citing a forward price-to-earnings ratio of 172.4.

It also highlights that while a cheaper EV could help Tesla in its core market, production has not yet started, even as competitors continue to pursue plans aimed at taking market share.

What investors should monitor

The article emphasizes that Tesla could face additional headwinds, particularly legal and regulatory risks that have already affected the business. It suggests that long-term investors who can tolerate significant volatility might consider Tesla, while others may prefer to stay away.