The Tesla conference call tonight could go into all kinds of topics, and CEO Elon Musk is known to pull a rabbit out of his hat from time to time. But there’s one fundamental question that will almost definitely be asked a few times, perhaps in different ways or perhaps in exactly the same way repeatedly: How much demand is there for Tesla vehicles? People will probably ask about each of the specific models individually — the Model 3, Model S, and Model X. They’ll probably also ask about overall sales and perhaps even about Model Y pre-orders.
This has been the fundamental question regarding Tesla (and TSLA) for a few quarters, and it will likely be the fundamental question for the next few quarters, at the least. I’ve been planning to write this article for weeks because it’s such an interesting, important, and difficult question.
Very generally speaking, the biggest difference between Tesla [TSLA] bulls and bears is a difference in how much consumer demand they expect. However, I think the discussions are often far more polarized than the actual assumptions. In part, that is because the assumptions can be somewhat similar but still put Tesla on two different sides of the profitability coin. The debates often break out along vague phrases like “strong demand” and “weak demand,” but I’d say are fundamentally split (in all but extreme cases) between the belief that Tesla has a lot of demand versus the belief that Tesla has a ton of demand. Of course, I need to clarify what I’m talking about because that’s vague as heck.
A bear case might expect consumer demand for 70,000 Tesla vehicles, or 50,000 Model 3s, a quarter. That’s still a really high number relative to other models in the price range, especially considering the relatively limited reach of Tesla stores and service centers (compared to conventional auto dealers). But it’s notably less than more bullish expectations of consumer demand for 100,000+ Tesla vehicles or 70,000+ Model 3s per quarter. Additionally, the difference in expectations could well be the difference between a profitable Tesla versus an unprofitable Tesla. (Note: I’m not saying Tesla needs to be profitable at this point, and many would argue that it shouldn’t be, while others argue that it must be, but it’s an important dividing line for the company right now.)
So, probably the biggest and most frequent question that will be asked tonight by Wall Street analysts is whether Tesla has a lot of consumer demand or a ton of consumer demand. Of course, the wording of bears and critics will be more negative than that. What is the answer?
No one really knows. Tesla, of course, has the most insight into the topic since it has detailed information about order rates, pent up demand in different markets, geographical trends, etc. Analysts will try to get such detailed info, and Tesla will hand over almost none of it, as has been the case for years. But even Elon Musk and the top consumer demand experts at Tesla can only guess. Nothing is static and the future is unpredictable. Tesla has been growing so fast and so much changed from week to week that there isn’t yet any steady-state data to use for firm forecasts. Furthermore, Tesla awareness, especially deep and broad awareness of Tesla products, is still quite low, but that will change quickly (probably exponentially) as people get their cars and show them to friends, family, coworkers, and people on the street. That word-of-mouth has been a big driver of new demand and will continue to be. How much? We don’t really know. Even Elon Musk has basically said, “Well, I don’t have a crystal ball.” (Not an exact quotation.)
Update: Tesla did note on the conference call tonight that nearly all orders in Q2 were new — not backlogged reservations — and the order rate so far in Q3 is higher. Elon said, “Yeah, I think demand in Q3 will exceed in Q2. It has thus far and I think we’ll see some acceleration of that. I think Q4 will be very strong. We expect quarter over quarter improvements. I think Q1 will be tough. Q2 will be not as bad, but still tough, and I’d say Q3 and Q4 of next year will be incredible.”
Historically, bulls have sometimes been too bullish and bears have sometimes been too bearish. Occasionally, even bulls are too bearish or bears are too bullish. In recent months, there was a dramatic case of false expectations. In the first quarter and most of the second quarter, there were really low expectations for 2nd quarter demand. Tesla shocked with a dramatic quarterly record in production and deliveries. I think that has put most people in a more open-minded state of mind about what the future holds. It’s hard to know if that will be a normal quarter going forward, if sales (deliveries) will keep rising as word of mouth grows and new markets open, or if Tesla demand has “peaked” and will struggle to match those Q2 numbers.
Again, the important point that I think is too often ignored is that the difference between most bulls and most bears comes down to a difference in expectations between a lot of demand (the Model 3 would likely still be the #1 car in its class in the US and some European markets) and a ton of demand. Purely looking at objective comparisons of the Model 3 and other cars, a ton of demand makes the most sense to me — the Model 3 is a much better car than a BMW 3 Series for a similar cost of ownership as a Toyota Camry or Honda Accord, or even a Toyota Corolla or Honda Civic. However, how many people actually know that? Humans are not known to be very rational actors, and the car market is full of spin and superficial, emotional, identity-focused advertising.
So, will “the demand question” be answered tonight? Of course not.
Will consistent bears or bulls change their opinions on the topic of consumer demand and Tesla’s future? I would bet against that.
What does the rest of 2019 hold? Who knows? What about 2020? Who knows?
The opinion I’ve had that I continue to hold is that Tesla will have obscenely strong demand in the long term due to how superior its vehicles are and how far ahead Tesla seems to be on batteries and vehicle software (including autonomous driving technology). However, guessing between short- to mid-term demand for 70,000 Model 3s a quarter versus 100,000 — or something else — seems sort of impossible. How many people out there are aware of Tesla, have learned about the benefits of Tesla vehicles, and have actually experienced the vehicles? How many of those people are in a position to buy or lease a car right now? How many are holding off a bit longer?
Until these kinds of questions are resolved, there will be a big push and pull between bears and bulls. And these questions won’t be resolved for at least a few quarters, probably several. In the meantime, expect all kinds of forecasts based on more or less nothing substantial. Those different forecasts will divide close followers of Tesla and will probably lead to a stock price roller coaster.
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