How Elon Musk Will Silence Critics and Sell 40,000 Tesla Model S Sedans in 2014

In Tesla's (NASDAQ: TSLA  ) 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.

Could this be 2014's best investment opportunity?
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (12) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2013, at 9:40 AM, TheOstrich wrote:

    Another assumption that all the other manufacturers are sitting on their hands.

  • Report this Comment On December 21, 2013, at 11:55 AM, StanO6 wrote:

    @TheOstrich, exactly! Just recently General Motors started work on putting a focus group together to study TeslaMotors! Rumor has it that they are almost finished with phase 1 and that they are now looking for office space with convenient restroom and water cooler access.

    Toyota? No interest.

    ;-)

  • Report this Comment On December 21, 2013, at 12:24 PM, duuude1 wrote:

    Hey StanO, The Ostrich can't hear you, his head's buried in the sand. The Ostrich's (and others with similar brains) assumptions, in turn, is that big established industries, and lots of money, is insurance against small companies with innovation in their DNA and lots of balls.

    Sat in a Tesla today at a showroom. Got to look at the frame and layout of the motors right behind and in line with the rear wheels. Checked out the rigidity of the frame, the workmanship, etc. Granted it's a display, but it was pretty impressive. Reminds me more of the engineering and materials in a fighter jet with the aluminum castings and extrusions than just a luxury sedan. It's little wonder that the Tesla broke the safety testing machine instead of the other way around.

    Got to lay my eyes on that Tesla profile which is not only gorgeous, but gives the Model S such an amazing drag coefficient (Cd = 0.24)

    Saving my pennies for Gen III. Where do I sign up? Oh yeah, right there on their website.

    Damn, so easy!

    Duuude1

  • Report this Comment On December 21, 2013, at 12:56 PM, StanO6 wrote:

    @Duuude1, about that: “Tesla broke the safety testing machine”

    In my world I imagine Elon dropping in on a rocket scientist at SpaceX and saying “Stop what you are doing and design me a roof that will withstand 4Gs”.

    “Sure boss, piece of cake, I'm on it!” :-)

    While this scenario is only in my mind, as far as I know no other car company has a resource of such quality so readily available.

  • Report this Comment On December 21, 2013, at 1:03 PM, NOTvuffett wrote:

    I can buy a Maserati with >400hp for less than the price of the Tesla model with the best range- and I can always put gas in it, lol. My guess is that if you are going to spend that much on a car, the price of fuel is not really a factor.

  • Report this Comment On December 21, 2013, at 1:41 PM, duuude1 wrote:

    Hey Daniel,

    The ability of Tesla to meet the 40k unit goal is not, as you point out, a demand problem. If they can make it, they will sell it. The problem is a manufacturing and supply chain issue. And of all the components, it's the batteries which are limiting, right? So where is Tesla in the process of resolving their supply chain problem? How will the supply chain issue impact getting to and getting past 40k units/year?

    Tesla plans to build a ginormous battery plant - but what's the reality of their supply chain agreements with Panasonic or Samsung or others?

    And StanO, I believe Elon Musk has made several comments that support your scenario - he sounds like a big proponent of cross-pollination between industries - and having internet, solar power, space vehicles, and electric auto companies under his belt - who's better at getting talent from one industry to solve problems in another!!

    NOTvuffett, I think your Maserati (Google suggests the Quattroporte as being in the price range you're talking about) would get it's doors blown off on the 0-60 and quarter mile compared to the Tesla.

    Look folks, in their day, the dinosaurs ruled. They were big. They were fierce. They didn't take crap from any rodents.

    And admittedly, at this moment, Tesla is a rodent.

    But guess what GM, Ford, Chrysler, Toyota, Honda, BMW, Daimler, and all the rest are?

    Duuude1

  • Report this Comment On December 21, 2013, at 6:22 PM, R0ll1ngSt0ne wrote:

    Hey, NOTvuffett - why in the world would you spend your money to buy that 20th century outdated crap if you could buy a Tesla?

  • Report this Comment On December 21, 2013, at 6:25 PM, R0ll1ngSt0ne wrote:

    NOTvuffett - a P.S. for you. Tesla Performance is 416 hp - plus instant electric torque. So your last century Maserati steam wagon is not impressing anyone. You are more than welcome to get it though - some people have appreciation for antiques.

  • Report this Comment On December 22, 2013, at 12:06 AM, NOTvuffett wrote:

    Ok, not really much happening in the market, so a good time for a bit of fun.

    How abought a road race, Amarillo to Albuquerque? I would leave you in the dust and searching for a very long extension cord, lol.

  • Report this Comment On December 22, 2013, at 2:45 PM, ckgod wrote:

    NOTvuffett Apparently you have never driven a Tesla. Do yourself a favor and arrange for a test driver if you are a car guy. That will change your perception of Tesla and EV forever. It's a pure driving pleasure bar none. Not only no ICE car is as good but it's safe to say no ICE car can ever be made this good.

  • Report this Comment On December 22, 2013, at 2:59 PM, ckgod wrote:

    @Ostrich @StanO Don't overlook the fact that Tesla's battery and drive train technology is miles ahead the rest of the crowd. You only need to look at the fact that the big, roomy and powerful Model S has about the same EPA rated eMPG of about 90MPG as those tiny and slow Leaf, Volt and i3.

    If Mercedes comes out of a 50MPG AMG S67 are you also going to say those competitors will not be sitting on their hands?

  • Report this Comment On December 23, 2013, at 11:19 AM, kca124cain wrote:

    Has Elon made his December cross country trip yet? I have not heard a word about it.

Add your comment.

DocumentId: 2767266, ~/Articles/ArticleHandler.aspx, 4/20/2014 2:22:04 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement