Tesla TSLA 2.48% has given the first signals that it is giving up on its ambition to become a mass-market car maker. Prospective customers should be angry, and investors ought to be wary.
Over the weekend, Chief Executive Elon Musk announced a new, $78,000 version of Tesla’s car for the people, the Model 3. More important was his admission that his promised $35,000 version would cause the company to “lose money and die” if built right away.
Tesla has struggled to produce a $50,000 version of the Model 3, and as the company burns through cash, the question is how many of those will be available once the faster $78,000 offering is ready. If Model 3 is suddenly a high-end car, then Tesla, whose other offerings start around that price, would be more comparable to Maserati than to Chevy, which is producing a $36,620 electric car.
The problem is investors have given Tesla a near $50 billion market cap in the belief the company will upend the global auto industry, not become a niche, high-end electric car maker. What that latter company is worth is hard to say, but it is not the current market valuation.
Then there are the nearly 500,000 Tesla die-hards who put down $1,000 deposits for what they thought was a car that started at $35,000. How many can afford, or would be willing to pay for the higher-end models? These refundable deposits account for a third of the cash on Tesla’s rickety balance sheet.
Mr. Musk said Tesla would produce a low-end Model 3 toward the end of the year, though Tesla’s forecasts are typically optimistic.
Granted, Tesla would hardly be the first auto company to promise a cheap base model with limited availability. And there are sound business reasons to hold off on production. Tesla burned more than $1 billion in cash last quarter, and the $35,000 Model 3 would be unsustainable to produce, Mr. Musk said.
If Tesla gives up on the mass-market, the company will produce a lot fewer cars than investors expect and its valuation should be questioned. Tesla’s market value is about $450,000 per car sold last year; that is more than 16 times the value assigned to peers like BMW AG .
Would a shift by Tesla make potential customers ask for their money back? The company hasn’t said how many depositors were only interested in buying the cheapest version of the car. Watching those numbers will be hard, too. It can take several months for customers to get refunds processed, so a refund request issued today might not show up in financial statements until November, when Tesla reports third-quarter results.
Giving up on the mass market may be the right decision for Tesla, but not for shareholders.
Write to Charley Grant at charles.grant@wsj.com