Can Tesla Motors Inc. Really Amplify Demand?

Tesla Motors (NASDAQ: TSLA  ) is rolling again, but bears aren't convinced. Even with the better-than-expected nearly 6,900 Model S sedans that were sold and delivered during the holiday quarter, skeptics wonder if the lofty valuations are justified. Is a market cap of $21 billion too much for a company moving 2,300 cars a month?

The answer, of course, is that Tesla isn't expected to move 2,300 cars a month forever, just as its average of a little over 1,800 cars a month the quarter before that didn't stick. Tesla will continue to ramp up its assembly lines, and it has big visions about where it will go.

During Tesla's third-quarter call, Elon Musk detailed annual demand goals that would result in selling 20,000 Model S cars in the U.S., another 10,000 in Europe, and another 10,000 to 20,000 everywhere else. If the Model X crossover that will hit the market in a few quarters meets similar demand, we would be talking about 100,000 cars a year between the two models. 

It naturally won't play out that way. The Model X will be incremental, but some of that demand will probably come at the expense of eating into Model S sales. Then again, things can get even better, since having two distinct models will help increase awareness of the brand. Asia could also be a huge market for Tesla at a time when the world's most populous nation is throwing its weight behind electric passenger cars.

However, it seems as if Musk feels that demand is something that can be orchestrated.  

"It doesn't make sense for us to do things to amplify demand if we can't meet that demand of production," he said back in November's earnings call. 

Amplify demand? Naturally, we're talking about marketing, but it remains to be seen what that would entail. It's not as if there are polo tournament sponsorships or full-page ads to be taken out in I Light Cigars With $100 Bills Monthly magazine. Tesla cars aren't cheap, and this isn't the kind of stuff that will change by forking over $4 million for a Super Bowl ad. 

It's not even the wealth factor, given the size of the addressable market that can afford a Model S or what will be a comparably priced Model X. There's also the "range anxiety" issue for a car that can't be compared to other premium vehicles since it needs to be plugged in between charges. Tesla's been building out a fleet of charging stations across the country to make cross-country trips possible -- and Musk himself will be embarking on such a trip later this year, when his kids are on spring break -- but that still complicates long journeys by mapping out the station locations and setting aside the time to charge up. 

Then again, it's fair to say that a Tesla owner will typically spend less time at a charging station than is cumulatively spent by other drivers at gasoline stations over the life of their vehicle ownership. That's a point that hasn't been amplified enough, and one would think that these charging stations will factor greatly in its marketing in the future, since it sets Tesla apart from the growing number of automakers putting out much cheaper electric cars. 

If production surpasses demand, Musk's plan to amplify demand will make all of the difference between whether Tesla shares continue to obliterate the market or fall back to earth.

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Read/Post Comments (4) | Recommend This Article (2)

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 January 25, 2014, at 5:11 PM, deeageaux wrote:

    Vehicles to market luxury products to wealthy people are not in short supply.

    There is no I light Cigars with $100 Bills magazine but there is Cigar Aficionado, the Golf Channel, Bloomberg Channel, Robb Report, etc etc etc. Remember, these are $70k-$130k sedans not Bugatti supercars.

    Tesla technology is not static. The price of a kWh of battery storage falls 7-8% per year. Info on a Giga Factory to build enough batteries to make the 3rd generation car is not far off and that will give Tesla a long term competitive advantage relative the to price other car makers pay for batteries.

    Then there is the Tesla Superchargers. They have already been upgraded once from 90 kWh to 120 kWh. Tesla has said 135 kWh is coming. Charging times of one miler per second or 300 miles in 5 minutes is maybe 6-8 years away. That will happen before there is a national hydrogen fueling station network. And the number of supercharger stations and standard non-proprietary charging stations just keeps growing.

  • Report this Comment On January 25, 2014, at 5:29 PM, Ustauber wrote:

    Thxtsla

  • Report this Comment On January 25, 2014, at 10:40 PM, CrazyDocAl wrote:

    Tesla's US sales were off this last quarter. If not for the new foreign market's demands it wouldn't have raised red flags. It would be one thing if production capacity was static but that's not the case. If US sales don't turn around or foreign sales don't skyrocket then extra capacity is going to drag the stock down. If the model X steals sales from the S that will also be a drag on the stock.

    Everybody loves a winner but they love to tear down a winner even more. If the stock was priced to match the company's worth it would be an issue but right now it's s far above it that the crash could be very hard.

  • Report this Comment On January 26, 2014, at 11:40 AM, truenorth00 wrote:

    @CrazyDocAl

    Tesla hasn't even released their sales numbers and yet you know that their US sales are down. Do share with us the source of your inside knowledge.

    Seems to me that somebody has a case of sour grapes from not getting in early or catching the recent dip.

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