Why did Tesla experience a significant drop: New Model 3 or FSD price reduction?

Tesla's stock price performed poorly last Friday, falling 5.1%, while the S&P 500 index rose 0.2%.

As for the reason for the sharp decline, most analysts focused on the new version of Model 3 launched in China and Europe. However, it is more likely that software is the cause of the stock price drop.

Possible reasons

The new version of Model 3 should have been positive news, but this announcement caused quite a reaction, possibly because Tesla's stock price had risen by about 18% in the two weeks leading up to last Friday's trading.

However, it could also be because investors were hoping for more differences in the new Model 3, and their expectations may not have been met by the market.

More importantly, with the launch of the new Model 3, Tesla is

FSD is Tesla's most advanced level of driver-assistance feature, and Musk hopes that this feature will eventually make Tesla vehicles truly autonomous.

A price reduction seems imminent, as Musk stated in July, "The price of FSD... is actually very low, not high," and "If this car is truly autonomous, its value will increase significantly... $15,000 is actually a low price."

Poor FSD penetration rate

Canaccord analyst George Gianarikas said, "The price reduction reflects the weakness in FSD penetration rate." He added that the price reduction may be "an attempt by the company to accelerate its razor-blade-razor model." In this example, the car is the razor, and FSD is the blade.

Gianarikas rates Tesla's stock as a buy with a target price of $293.

Tesla has been cautious about disclosing the number of customers who have purchased FSD, but during the Investor Day in March, one figure was mentioned: 400,000. At that time, Tesla had sold approximately 4 million vehicles worldwide, resulting in a penetration rate of about 10%.

Tesla's penetration rate needs to increase to around 13% to achieve breakeven at a lower price point. It needs to do slightly better to achieve breakeven on the gross profit generated from FSD sales, which requires a penetration rate close to 14%.

If the penetration rate does not change with the price reduction, Tesla's gross margin may be lower.