Tesla Rolls Out Cheaper Model 3 in Europe, Highlighting Growth Stalls and Valuation Risks

What happened

Tesla has introduced a lower-priced Model 3 Standard variant in Europe, expanding its product range to target more affordable electric vehicle buyers, just months after a similar U.S. launch. This move occurs against a backdrop where Tesla's core automotive growth has stalled, with 2024 deliveries roughly flat and a 13% year-over-year drop in Q1 2025, amid intensifying global competition from Chinese OEMs like BYD. The cheaper offering is likely a defensive response to price wars and moderating EV demand, which could further compress margins that have already declined from 2022 peaks despite significant capital expenditures. While this may provide a short-term volume boost, it fails to address the astronomical valuation of ~259x TTM EPS, which prices in highly optimistic outcomes for Robotaxis and FSD that lack financial evidence. Investors should view this as a tactical maneuver to navigate near-term headwinds rather than a strategic pivot that enhances long-term profitability or justifies the current stock price.

Implication

The cheaper Model 3 could lead to a modest increase in European deliveries in the near term, but it is unlikely to reverse the broader trend of stagnant growth in Tesla's core auto business. Margins are poised to face additional erosion from this lower-priced offering, potentially worsening free cash flow, which has already declined from 2022 highs amid heavy capex. This move underscores Tesla's vulnerability to competitive price aggression, especially from cost-advantaged Chinese manufacturers, limiting its pricing power and highlighting the cyclical pressures in the capital-intensive auto sector. With the stock trading at 259x TTM EPS and a DCF indicating intrinsic value ~90% below the current price, such operational adjustments do little to bridge the gap between current financial performance and embedded growth assumptions. For investors, this reinforces the high execution risk and minimal margin of safety, maintaining the rationale for a cautious or bearish stance until demonstrable progress on autonomy or sustained margin recovery emerges.

Thesis delta

The introduction of a cheaper Model 3 in Europe does not shift the bearish thesis; instead, it may intensify margin compression risks in a competitive landscape, failing to provide evidence for the optimistic autonomy and robotics outcomes priced into the stock. This tactical response to demand challenges underscores the disconnect between Tesla's cyclical auto operations and its lofty valuation, reinforcing the 'STRONG SELL' recommendation without altering the core concerns about growth stagnation and overvaluation.