The goal of this series is to examine current topics being written about Tesla [TSLA] that appear to be stirring up “Fear, Uncertainty and Doubt” (or FUD). The plan is to try to provide reasonable analysis about the validity of the claims. I generally do not link to the articles that “inspire” me to write this, as I do not wish to reward analysis I feel is poor with increased traffic. However, I will freely admit that my analysis may contain incorrect assumptions, and will do my best to acknowledge them in future articles.
I wasn’t planning on writing this article originally. However, after the incredibly positive Tesla Q3 earnings call, Tesla released its 10Q document with more detail and it started a whole new round of debate from analysts centered around a few things, the biggest being that sales in the United States fell 39% in the third quarter compared to a year ago.
This “problem” has such a stupidly obvious reason that I figured people would move on quickly, yet I am still seeing articles written daily from different sites stating that demand is falling in the US, and how this is a huge problem.
Spoiler: It’s not. But, before I give the reasoning, my usual reminder:
As of about a month ago, I now own 15 shares of Tesla stock. I am open to increasing my position in the company, although I have no plans to do so at this point in time. I would not suggest anyone use the following article as their sole data point to decide to invest nor sell shares in Tesla. I write these articles simply to give a Tesla-investor’s perspective into how I analyze the company.
Let’s first look at actual US demand. We recently hosted another article about demand on CleanTechnica that looked at the problem a bit and concluded demand is strong. It also included the following chart from InsideEVs, which it cited as the evidence that bears are using to bolster the “lack of Model 3 demand” theory:
|Source: InsideEVs Plugin Scorecard, EVANNEX|
And look at that, demand is down, right?
Well, first, let’s be really clear — demand is different than sales. While I feel that this is obvious, apparently it is missed by a bunch of people. Let me explain it like this:
Through at least Q3 of 2018, Tesla was selling cars in the US to people who had put their money down as a pre-order. I know this for a number of reasons, including that I put money down on a Model 3 more than a year and a half after it’s reveal, and Q3 2018 was when my car was delivered. In fact, from following multiple pre-order lists, Tesla owner groups, and so on, almost everyone who had pre-ordered and requested a long range version of the car was contacted in Q3 2018 to take delivery, and the few people who weren’t were contacted early in Q4.
What does this have to do with demand and sales? In Q3 2017, Tesla sold 222 Model 3s. Not because demand wasn’t there, but because Tesla only made 222 Model 3s to sell. I would guess that demand in Q3 was about 79,896 cars (which is the cumulative sales of the Model 3 between launch and the end of Q3 2018) as those sales were largely to people who pre-ordered and were willing to wait for the car to become available. Had Tesla had 80,000 Model 3s to sell in Q3 2017, I think the company would have done so.
In other words, as long as demand outpaces the quantity you have to sell, the sales numbers don’t represent demand.
At the same time, Tesla was really only delivering the Model 3 to the US market at this time. A big part of the reason for this was that they were trying to meet the pent up demand while the tax credit was still fully available, which, because of the poor way that it is implemented caused demand to spike in Q4 of 2018 as buyers (correctly) realized that the tax credit would be going away and they should purchase beforehand. Tesla, knowing it could sell those cars for a slightly higher price, had a large incentive to push sales to capture the tax credit and any additional revenue that it helped to bring.
In Q1 of 2019, Tesla dropped the price of the Model 3 by $2,000 in response to the beginning of the reduction of the federal tax rebate. Tesla stock dropped almost 7% the day this happened (I wrote about it here!) even though the price for the end user actually still went up by $1750.
Since Tesla knew the company pulled forward demand that might have otherwise waited until Q1 of 2019, Tesla used Q1 to focus on overseas sales, and only sold ~22,500 vehicles in the US. At the end of February 2019, Tesla introduced the Standard Range Plus variation of the Model 3, which started delivery in Q2 of this year.
Some of the sales in Q2 may have been from people who had pre-ordered the car and been waiting to get the cheaper variation. Although, between the tax credits and the Mid Range vehicle being introduced in October of 2018, I think there were very few pre-orderers who would have opted to wait.
Anyway, what’s the point of all of this? Simply this: it’s nearly impossible to separate the demand of the Model 3 from the sales of the Model 3 because sales have been supply restricted, the tax credits have shifted demand patterns, Mid-Range and Standard Range variations of the car capitalized on different potential demand segments, and so on.
Perhaps the first quarter that sales were less impacted by all the different shifting issues was Q2 2019, in which case we really only have two quarters of data to look at, which show sales declining from 45,225 to 44,000, or about 2%. Which is completely immaterial.
Additionally, Tesla sells its cars to a worldwide market, meaning that demand in one market doesn’t matter as much, and it could (and should) play with demand factors in other countries to be able to sell as many vehicles as possible at any time for the highest price throughout the world. For instance, lately, Tesla has been prioritizing sales to the Netherlands due to a tax incentive that reduces significantly at the end of the year. And Tesla should — if that tax incentive helps the company sell at a slightly higher price, that additional money helps Tesla accelerate other product lines. The fact that the US delivery estimate when ordering a new Tesla has been pushed out, to me, shows that Tesla is prioritizing markets where it can earn the largest margins, not that demand is softening anywhere.
As an investor, that is exactly what I would want them to do.
FUD articles are continuing to use demand as a bogeyman because you can spin the data for demand any way you want to. After originally thinking these FUD articles would go away because of how obvious the different incentives, tax credits, product variation introductions, and pre-order list made this FUD transparently baseless, I’m now guessing we’ll keep hearing this stuff for a few more quarters. If Model 3 worldwide sales continue to grow as Gigafactory 3 comes online, as I expect they will, I think we’ll see this particular issue finally be put to rest.
I hope so, at least.
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