Why I Canceled My Model 3 Order

I put a $1,000 deposit on a Tesla Model 3 the day it was announced. At the time I thought of the Model 3 as a smaller, cheaper version of the Model S. So a few days ago I stopped by a Tesla store to check out the Model 3. I was at the store not as an investor evaluating Tesla’s latest product but as a buyer, ready to buy.

The shopping experience ended up being quite odd. Tesla’s Denver store did not have a Model 3 in the showroom or available for a test drive. I was told they will not get one for several months — the Model 3 is infamously behind  schedule. But still, Tesla is producing thousands of cars: Why not send 100 to their stores so people can see and drive before they buy?

I thought it was also odd that when I asked a salesman to show me pictures of the Model 3, he did a Google search. He did not even have pictures of the car on Tesla’s internal site (the one he used to show me pricing options). Tesla’s external site also doesn’t have photos of the Model 3, just a few videos.

When you are in a showroom that has only the Model S and Model X on display, it is easy to imagine that the Model 3 is just a smaller version of the Model S. It is not. In all fairness, Tesla CEO Elon Musk was clear about that when he expressed the concern that the Model 3 would hurt Model S sales. The Model S is a luxury car with a soft suspension; the Model 3 is a smaller, utilitarian car with a hard suspension.

Also, at $35,000, the basic Model 3 is truly basic. If you want a semi-decent car with leather seats and safety sensors, the price quickly jumps to $55,000 (all-wheel drive won’t be available until late 2018). If you order a Model 3 today, there is a chance you may get tax credits (which could be as high as $12,000 between federal and state), but this completely depends on Tesla’s production schedule, which so far has been disappointing. If your car is delivered after June, the tax credits rapidly decline and then disappear.

When I put down the $1,000 refundable deposit, I was making an emotional but semi-rational decision: I gave Tesla an interest-free loan to reserve my place so that in the future I could make a rational decision to buy the Model 3 or not. As that time approaches, it’s clear that it’s hard to commit $50,000 to a car that is unseen and undriven.

Also, as much as I’d like to buy an electric car, it is difficult not to compare the Model 3 to internal combustion engine cars. For instance, at $35,000 the Model 3 competes with a fully equipped, roomier hybrid Honda Accord. By the way, when I say “fully equipped”, I mean everything from the leather and safety sensors to premium packages. At $55,000 the Model 3 is competing with real luxury cars like the Lexus ES, which comes with all the bells and whistles for $44,000.

To be sure, comparing an electric car to its gasoline-powered peers is not fair. But in the end, a car should get you from point A to point B. Yes, the Model 3 saves money on gas, but I don’t see how rational people (outside of some enthusiasts) will pay $11,000 more for a utilitarian car than, for example, they would pay for a roomier, fully equipped Lexus ES — which has been stably in production for a long time and doesn’t have any of the software and hardware bugs that are crawling all over the Model 3. (And unlike with models S and X, Model 3 owners don’t get to use Tesla’s supercharger network for free.)

As I was contemplating writing a check for $55,000, the Model 3 started to feel less and less appealing. I started thinking about a three-year-old Model S instead (plus, I’d get to use Tesla superchargers for free). Or maybe I should wait for electric cars from other automakers.

I share this experience because I’m probably not the only one thinking this way. As the dollar meets the road and a lot of Model 3 depositors visit Tesla showrooms, they will likely have similar second thoughts. Consequently, Tesla may discover that lower Model 3 production levels will be sufficient to meet declining demand after a raft of deposit cancellations.

I am not short-selling Tesla stock, and outside of my $1,000 unsecured loan (my deposit) neither my firm or I have a position in Tesla. But it is becoming difficult to see how the Model 3 will be the car that leads Tesla to profitability. As for my deposit, I’ll be getting it back before it’s too late.

And one more thing…

I am not a journalist or reporter; I am an investor who thinks through writing. This and other investment articles are just my thinking at the point they were written. However, investment research is not static, it is fluid. New information comes our way and we continue to do research, which may lead us to tweak and modify assumptions and thus to change our minds.

We are long-term investors and often hold stocks for years, but as luck may or may not have it, by the time you read this article we may have already sold the stock. I may or may not write about this company ever again. Think of this and other articles as learning and thinking frameworks. But they are not investment recommendations. The bottom line is this. If this article piques your interest in the company I’ve mentioned, great. This should be the beginning, not the end, of your research.

Read this before you buy your next stock

Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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