Tesla may have a problem with demand for one model

Tesla may have a problem with demand for one model

Tesla Model 3

Tesla has a demand problem with one of its models. Investors should take note and pay attention to what the electric-vehicle giant is doing to fix the situation.

Used-car data tell the story. Cars.com (ticker: CARS) looked at the average price and age of used Tesla (TSLA) vehicles on its site for Barron’s, comparing prices in early June and a year earlier.

The data show prices are down for both used and new vehicles, with new prices off by roughly 10% to 20% year over year. That’s not a surprise as supply/demand has normalized and Tesla has trimmed prices on many of its models.

What the data also show, however, is weakness in prices for one model that the company should address.

Models S and X aren’t the issues, even though used pricing for those vehicles is down by more than 30% from last year. Those are low-volume vehicles. What’s more, the average age of a used S and X listed on Cars.com is increasing. The older a car, the less it typically costs.

That leaves two other models to consider: the Model Y and Model 3.

A year ago, a used Model Y listed for almost $73,000 on Cars.com. That was more than the $66,000 base price for a new long-range Model Y. Used cars costing more than new cars isn’t typical but can happen for a few reasons. Mainly it happens because supply and demand is tight. Wait times for Tesla in 2022 were longer and if buyers wanted a Tesla now they had to pay up. And the average used-car price includes many trims more expensive than a base model costs.

That situation has normalized as Model Y inventory increased and wait times for new vehicles decreased. Today, the average price for a used Model Y is about $49,500, roughly $1,000 below the new price for a long-range Model Y.

Used prices have fallen more than new, which could signal a demand problem for the Model Y. But the average age of a Model Y on Cars.com is up by about one year. A car typically loses 15% to 20% of its value each year early in its life. Adjusted for price cuts, the Y is doing just fine.

That leaves the Model 3. A year ago, a used Model 3 listed for almost $52,000, on average, a little more than a new Model 3. Today, a used 3 lists for about $38,000, down roughly 25%.

That’s a bad sign for two reasons: The average age of a used Model 3 is down a little—the cars are younger—and the price of a new Model 3 has come down by only about 6%.

The implication is that demand for the Model 3 has weakened. And its age might be an issue. The Model 3 first shipped in mid-2017, making it relatively old in car years and possibly due for a refresh, something that often reinvigorates sales. The Y first shipped in early 2020.

Tesla has refreshed models before. In late 2021, Tesla updated the Model S and X with Plaid editions that had better acceleration. That reversed a trend of declining sales. Model S and X deliveries hit about 25,000 units in 2021, down from about 57,000 in 2020. Sales in 2022 bounced back, coming in at almost 67,000 units.

The good news for investors, and car buyers, is that a Model 3 refresh could be coming. Industry insiders have been leaking pictures of wrapped-up Model 3s, a sign that a refreshed version is in the works. Tesla didn’t respond to a request for comment from Barron’s about a Model 3 update.

Whether the Model 3 will get a full redesign or just some software tweaks and minor upgrades isn’t known. If demand really is weakening, it will rev up the debate about just how many models a car maker needs in an EV world with more software on vehicles that can improve things after a vehicle has been purchased. Tesla CEO Elon Musk said at the company’s March 2023 investor event that it shouldn’t take more than 10 models to hit 20 million annual unit sales.

That would be 2 million units a year per model, on average. That could be tough. A model selling more than 1 million units a year isn’t typical, and only a handful, likely including the Model Y in 2023, may top that amount.

How a refreshed Model 3 sells will be an important data point in the debate, when or if it arrives.

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