Consoles are often sold at a loss, and I’m sure the Series S is being sold at a deeper loss than most due to its impressive specs. It may not be reasonable to expect MS to sell the console with a bigger hard drive at that cost (though, of course, it wouldn’t bankrupt them or anything; they’d just make a slightly less ludicrously huge profit than they will now).
I do still think it’s a mistake for the SSD to be that small given its audience, though. It may have been smarter to raise the price by $50 and put in a bigger SSD, or maybe make it only capable of 1440p instead of 4K and keep the price the same. The issue with that is that 4K is a very marketable thing and a bigger SSD isn’t really.