In January 2011 Tesla (NASDAQ:TSLA) presented an aluminum body of its planned Model S. Producing just hundreds of its fully electric sporty Roadsters per year at the time, CEO Elon Musk's prediction that Tesla could sell 20,000 of these luxury family-sized vehicles in the first full year of operation sounded a bit crazy. Fast-forward to the end of 2013, the company's first full calendar year of Model S sales, and Tesla had sold 22,477 vehicles.
Now Musk is sounding crazy again. The company says that, thanks to its planned Gigafactory and a lower-cost car scheduled for a 2017 launch, Tesla could sell 500,000 vehicles annually by 2020. And once again, Musk's prediction is difficult for the general public to believe. And Tesla skeptics are concerned: If there is a risk posed to demand, is Tesla's plan to build a factory that will more than double worldwide production of lithium-ion batteries a risky bet?
Sure, the Gigafactory would be risky if a path to annualized demand in the hundreds of thousands was risky. But the path is clear. In fact, I think demand for 500,000 Tesla vehicles annually by 2020 sounds very reasonable. Here's why.
A proven value proposition
People love the Model S. In fact, that's probably an understatement -- the Model S is hands down the best car ever built. Just take a look at this exhaustive list of accolades for the car if you have any doubts.
And despite severely limited supply and zero spending on advertising, the Model S was the top-selling vehicle in North America among comparably priced cars in 2013.
As it turns out, electric cars are not just greener than traditional internal combustion vehicles -- they are better, too. Take a test drive in a Model S and suddenly the luxury ICE vehicles you once envied will seem terribly antiquated. Moving gears, rampant fluids, and noise will seem both excessive and unnecessary.
The Model S has proven in an incredibly short period of time that the fully-electric Tesla value proposition is compelling. Imagine a similar value proposition to the one the Model S presents but at $35,000, the planned price point for Tesla's third-generation vehicle scheduled to launch in 2017.
A massive market with very low penetration
Or here's another way to think about it: Is 500,000 cars really that bold of a bet? Today, Tesla's deliveries are just a small fraction of the broader auto market.
Enter a very helpful chart found in Tesla's corporate presentations:
Of course, Tesla's more affordable third-gen vehicle will dramatically expand Tesla's addressable market beyond the global premium auto market outlined above.
Massive addressable market or not, Tesla only expects to sell 35,000 vehicles in 2014. Some doubters may protest, "How, then, could Tesla predict to sell 500,000 vehicles annually in just six years?"
Actually, by year's end, Tesla estimates that the rate of sales in Europe and Asia combined will be almost twice the sales in North America. Assuming Tesla's North American delivery rate in 2013 holds, this would imply that demand for the Model S alone could reach a rate of 70,000 vehicles per year by the end of 2014 -- already about 15% of Tesla's goal for annualized deliveries in 2020.
So, do I think 500,000 vehicles is an unreasonable aspiration? Not at all. A proven value proposition, a basically untouched addressable market, and soaring sales at a much higher price point than the planned price for Tesla's third-gen vehicle give me plenty of confidence that future demand will be adequate enough to make use of the Gigafactory's production capacity. Five-hundred-thousand vehicles per year by 2020 is a realistic projection.
To top it all off, Tesla's Alexis Georgeson just confirmedwith The Motley Fool that the company has "no plans to initiate any paid advertising." Demand, apparently, still isn't an issue for Tesla -- even in the foreseeable future.
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Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.