Is Demand For Tesla’s Model S Falling?

Tesla Motors (NYSE:TSLA) lost* 50 cents on the dollar on a GAAP basis in the first quarter of fiscal 2014. During the quarter, the company’s revenues stood at $620.5 million, up from $615.2 million in the fourth quarter. The automaker produced 7,535 Model S vehicles and delivered a total of 6,457 vehicles, outpacing its own guidance. This means that Tesla is on course to meet the 35,000 deliveries target for the full year of 2014, which is in line with the previous guidance. ^[1]

Prior to the announcement of the earnings report, there was much speculation surrounding Tesla’s North America sales. Barclays, Gartner ^[2] and Morgan Stanley ^[3], all issued reports saying that deliveries in North America were down and used this data point to suggest that demand for Tesla’s Model S had plateaued in the region. Is a slowdown in deliveries an indication of declining demand for Tesla’s products? Moreover, is a decline in North America an alarming sign for the company? In this analysis, we will try to answer both these questions.

We have a price estimate of ~$150 for Tesla, which is about 25% below the current market price.

Do Reduced Deliveries Mean Reduced Demand?

Tesla has been engaged in a plan to ramp up production by trying to make its assembly line more efficient. The company started the quarter producing 500 cars a week, but ended it with the number up to 580. Considering that of the 6,437 cars delivered by Tesla over the quarter, 1,000 cars had been produced in the previous quarter, it means that cars produced in roughly the last three weeks of the quarter will only be delivered in the next quarter. Tesla announced that it expects to produce somewhere between 8,500 to 9,000 cars in the second quarter, with a delivery target of 7,500. These numbers indicate that the lag time between production and deliveries will only come down by a marginal amount over the next quarter. ^[4]

The reason behind the growing concern that demand for Tesla’s vehicles is falling is that even though delivery times have stayed constant, deliveries have been falling. The delivery time for a Tesla Model S can vary between just under a month to over two months. Average delivery times are skewed by the fact that top end models are usually delivered a lot faster. ^[5]A better way to estimate demand for Tesla is by looking at customer deposits, and this number has grown every quarter. Looking at the data collected by volunteer trackers at the Tesla Motors Club Forum, it is possible to estimate the demand for Model S. ^[6] As analyst Siddarth Dalal on Seeking Alpha website has already shown ^[7], at $5,000 for a production model and $40,000 for a signature Model, the deposits for the Model X cannot exceed $134 million. However, as per the filings made in Q1F2014, Tesla’s customer deposits stood at $198 million. This means that $64 million of the overall deposits were for the Model S, implying orders of over 25,000 cars, at a $2,500 deposit per car. This number is likely higher than the actual figure as it does not include orders for Signature models in some markets. For every 100 orders for the Model X, there are 12 for a Signature Model. If we assume the same ratio for the Model S, it means that at least 13,000 orders for the Model S have already been registered with Tesla.

Has North America Demand Plateaued?

As already shown, reduced deliveries are not a pointer towards reduced demand. Deliveries for the Model S in Europe stood at 3,056 in the first quarter. ^[8] This means that 3,401 cars were delivered in North America, a considerable decline from the 4,900 deliveries made in the same quarter last year. However, this was to be expected. For one, Tesla’s production has been constrained by the limited supply of batteries. Secondly, 90% of Tesla’s total sales were made in North America last year. As Tesla expands into international markets, an increase in delivery times in the U.S. was to be expected, especially given the constraints on battery supply.

Last year, Tesla modified its nine stores in Europe from the Roadster campaign to re-purpose them for the Model S. These include stores in the two biggest EV markets in Europe- Norway and Switzerland. Meanwhile, Tesla also launched three new dealer sites in U.K., Belgium and Netherlands, in addition to four new service centers in Netherlands, Belgium, Germany and Austria. All this, in addition to the much publicized launch in China, where the management has already stated that the demand is so high that if it tried to fulfill it, there would be no vehicles left to sell elsewhere. ^[2]

Moreover, as the company manages to make its assembly line more efficient, it might be able to bring down the lag time between production and deliveries. We expect the company to be able to meet its sales target of 35,000 vehicles for the year.

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Note: *Tesla had introduced a new lease program earlier in 2013. GAAP requires Tesla to spread out the revenues of the cars sold through this program over the lease tenure (i.e. treating these revenues as deferred revenues). Therefore, a better method to gauge the automaker’s performance is to analyze the non-GAAP figures. On a non-GAAP basis, Tesla’s revenues were $713 million, down from $761.3 million in the fourth quarter. The net income stood at $17 million, or 12 cents a share.

1. Tesla Motors Investor Relations [↩]
2. As Sales Level In The US, Tesla’s Model S Charges Ahead in Europe and China, DailyTech, April 2014 [↩] [↩]
3. Morgan Stanley Not Concerned Over Predicted Decline In North American Tesla Model S Sales, InsideEV’s, April 2014 [↩]
4. Tesla Motors’ Elon Musk on Q1 2014 Results, Seeking Alpha, May 2014 [↩]
5. Waiting Time For a Tesla Model S, Tesla Motors Club Forum, January 2014 [↩]
6. Tesla Model X Tally, Tesla Motors Club Forum [↩]
7. Tesla Earnings Call Decimates Most Bear Arguments, Seeking Alpha, May 2014 [↩]
8. Tesla’s Europe Sales, Tesla Motors Club Forum, April 2014 [↩]