In Tesla's (TSLA -1.92%) second-quarter letter to shareholders the company said it anticipates annualized demand for the Tesla Model S to reach a point that exceeds 40,000 vehicles by late 2014. That's a nice number, but how did Tesla arrive at it? And is it realistic?

Model S. Source: Tesla's official Twitter page.

The math behind 40,000
The reasoning for 40,000 vehicles is based on some very elementary assumptions. As the company explained in its second-quarter-earnings call, weekly net orders in North America suggest annualized demand at a rate of about 20,000 vehicles per year. In Europe, Tesla expects annualized demand to be half as good as it is in North America. The other 10,000 will come from "China and the rest of Asia and other countries."

As we'll see, however, these estimates may be too conservative. Let's take a look at each region.

First up is the U.S. Sure, 20,000 weekly net orders is a great indicator of annualized demand. But perspective is necessary. There's no reason to call 20,000 the maximum level of demand for Model S in North America, particularly because Tesla doesn't spend a dime on advertising. Musk elaborated on this concept in the second-quarter-earnings call: "We are not trying to push it higher than that because it's kind of pointless to push volume when you don't have the production to meet it." Even more, management said in its third-quarter-earnings call that Tesla saw "a pretty solid increase in [Model S] reservations in Q3 in North America compared to Q2." That increase, too, was accomplished with no advertising budget.

What about Europe? When it comes to premium sedans, "more are sold in the Greater EU areas than in North America," Musk said in Tesla's second-quarter-earnings call. But due to the greater costs of the Model S, since it's coming from the U.S., Musk feels more comfortable estimating sales at just half of the annualized rate in North America. Indeed, weekly net orders in Europe reflected an annualized rate of 10,000 vehicles in third quarter. But Musk again was quick to remind listeners on the third-quarter call that "it doesn't make sense for us to try to drive that demand higher if we aren't able to meet it." Then Musk followed up with a bullish statement: "We want to make sure that we are laying the ground work for future demand increase and I think we could get demand in kind of Greater Europe to be similar to that of North America and it seems like that seems pretty achievable to me."

Is 20,000 in annualized deliveries Tesla's new estimate for potential demand in greater Europe?

Finally, in Asia the big wildcard is China. If there's any market Tesla has underestimated, it's China. 

Too conservative?
So, that's how Tesla gets to a rate of 40,000 annualized deliveries of Model S. If anything, this estimated rate is likely too conservative. But investors seem to have already taken this into consideration; trading at 10 times sales, Tesla's stock is essentially priced for perfection. In fact, it's arguable that the company's alleged more affordable Model E is already priced in.

But here's the good news for Tesla shareholders. With an annualized rate of deliveries of 40,000 of Tesla's high-end sedan seeming so reasonable, Tesla's big juicy expectations for its more affordable Model E are starting to sound like reasonable estimates and not some hopeful goal.