The Model X Could Help Double Tesla Motors Inc.'s Sales

Tesla Motors (NASDAQ: TSLA  ) delivered 22,477 vehicles in 2013. But by the end of 2016, it's likely that Tesla could be delivering cars at a rate of 150,000 vehicles per year thanks to a global rollout and, importantly, a 2015 launch of the Model X, Tesla's electric SUV. This estimate isn't arbitrary; it's based on two comments from management.

Tesla Model X. Tesla says that the Model X is "designed from the ground up to blend the best of an SUV with the benefits of a minivan, as only an electric car can." Photo: Tesla Motors.

Management has greater visibility
Thanks to detailed knowledge product plans, operating data, existing orders, the rate at which the company is taking orders, and a host of other factors, Tesla's management has far greater visibility into the future than investors do. For that reason, I'm always on the lookout for clues from the company about how it feels about the future.

For example, previous comments from management showed that Tesla's target for an automotive gross profit margin of 25% by the end of 2013 was already in the bag when Tesla reported second-quarter earnings, despite a reported 13% profit margin on its auto business at the time. And the fact that Tesla has confirmed with The Motley Fool that it has "no plans to initiate any paid advertising" also serves as a nice indicator of management's confidence in demand for the foreseeable future.

Insight into Tesla's potential demand
Now, the combination of Tesla's fourth-quarter letter to shareholders and its fourth-quarter conference call provides a nice clue about how management could view demand all the way out to the end of 2016.

First, let's look at a comment from the Q4 letter: "The potential in Europe and Asia is even more significant. Towards the end of the year, we expect sales in those regions combined to be almost twice that of North America." Assuming Tesla's current supply limited rate of deliveries in North America holds strong, that could mean Tesla is delivering vehicles at an annualized rate of about 70,000 vehicles by the end of 2014.

Next, Tesla CEO Elon Musk gave us a glimpse of just how bullish the company is about its next big project, the Model X, in the fourth-quarter conference call. 

[T]he Model X demand is very high. ... Even though there is zero marketing for the Model X ... demand seems to be remarkably high. ... In relative terms, it appears that the X will see at least as much as demand as the S. And if I were to guess -- and this is just a guess -- I think the X demand will exceed S demand. ... That's my best guess.

Of course, Tesla management has far greater visibility into Model X demand than investors, so if there's any guess that's worth listening to, it's probably Musk's.

Assuming Tesla can continue to ramp up production every year, it's reasonable to assume Tesla could be selling its two luxury models at a combined rate of about 150,000 vehicles (slightly more than double the projected annualized rate of 70,000 Model S deliveries by the end or 2014) per year by the end of 2016, considering that it will begin volume deliveries to customers in the spring of 2015. 

It's also worth noting that someone I know who recently reserved a Model X has a reservation sequence number of 8,356.

Screenshot from customer email from Tesla.

Tesla's customer email correspondence says that the "Reservation Sequence Number indicates your place in our reservation queue and the order in which you'll be invited to finalize your Model X configuration, options, and packages." If 8,356 really is the number of reservations for the vehicle, that's a considerable number -- more vehicles than Tesla has delivered in any single quarter so far. Further, if it does indicate the exact number of orders, it's likely a reliable figure; customers (at least in the U.S.) have to make a $5,000 deposit to reserve their vehicles.

The big takeaway for Tesla investors is that if it's easy to see a clear path to an annualized rate of demand for 150,000 luxury vehicles per year by the end of 2016, Tesla's aspiration for 500,000 vehicles per year doesn't sound so crazy -- especially with the help of a car that will be priced at about half of what the Model S is to be launched in 2017. Of course, Tesla's plan to build the world's largest factory for lithium-ion batteries should help, too.

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Read/Post Comments (9) | Recommend This Article (3)

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 March 11, 2014, at 12:08 PM, tchams wrote:

    Bought two shares in November...How long until I can afford a Tesla?! haha

  • Report this Comment On March 11, 2014, at 12:34 PM, Capt601 wrote:

    Model x could be very big in Europe where SUVs are not driven due to fuel cost. Imagine being able to charge up every night In your home for significantly less than a gas car , and than take road trips using the tesla superchargers for free?

    Very expensive now with European gas prices to take road trips, and they love driving there. But to do it for free in A bigger vehicle that could hold your entire family and baggage.

  • Report this Comment On March 11, 2014, at 5:44 PM, michael63636 wrote:

    Please forward to:

    Elon Musk

    Tesla's vice president of business development, Diarmuid O'Connell

    File lawsuits in Federal Districts Courts against persons denying TSLA the right to sell cars directly to the consumer.

    The Ninth Amendment to the US Constitution states:

    "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people."

    TSLA reserves the right to sell cars directly to the consumer, under the Ninth Amendment.

    File the lawsuit against Chris Christie under 42 U.S.C. § 1983. This statute covers denial of constitutional rights under color of authority.

  • Report this Comment On March 11, 2014, at 8:53 PM, speculawyer wrote:

    Double? Unlikely. But it should help grow sales.

  • Report this Comment On March 12, 2014, at 2:55 AM, dotKamala wrote:

    I reserved mine on Feb 21 and my reservation number is 8030. Over 300 reserved in the last two weeks or so? Awesome!

  • Report this Comment On March 12, 2014, at 9:53 AM, TMFDanielSparks wrote:

    @dotKamala -- that's cool to know! Thanks for the comment.

  • Report this Comment On March 12, 2014, at 11:39 AM, DoubleFelix wrote:

    You can get a reservation number without putting down any money. Just click the wire transfer option. Those aren't all serious orders.

    Are you aware of the actual order rate in Europe? It is barely a trickle.

    Beware of that "strong backlog" thing. Musk is rushing as many of the US backlog orders into the first quarter as possible because Europe has not delivered. There won't be much of a backlog left in April.

  • Report this Comment On March 12, 2014, at 2:36 PM, ffbj wrote:

    So what! They are selling every car they build made to order. Numerous awards and accolades, and yet people such as yourself try to poke holes in this wonderful story. Yes, change and innovation can be painful, figure you were a typewriter manufacturer, or stockholder in said company just prior to the computer revolution, what you say?.

    Oh they are just too complicated, or you don't need a computer just to type a letter. Etc...

    There is reality, and then there is our view of that reality.

    Trying to say that the ev revolution is not happening, or Tesla is foundering, for instance, because demand in Europe is light, is just foolish. You are trying to deny or bend a reality

    that is unfolding to line up with your views, when in fact you should be doing just the opposite. Allow reality to shape your views, not the other way around.

    If you want use the old saw, 'but we make our own reality,' please don't bother, as that is not applicable, in this case.

    Yes, and all the reservations for Model S where just fantasy too. An incredibly high number of those contracts where consummated. So give me a break.

  • Report this Comment On March 12, 2014, at 8:52 PM, DoubleFelix wrote:

    ffbi:

    That is just hysteria. I deal in the world of reality. In the real world, a $100,000 vehicle that gets an honest 170 miles is a plaything for affluent status-seekers. And the backlog of that class of buyers is running out. There is no juice from Europe, so now the hopes hinge on China. Failing that, Tesla is sucking everything they can get out of their backlog, which is shrinking fast.

    I don't deny that electrification is an important trend for future vehicles. And at the point that somebody can offer a practical vehicle with honest 300 mile range for under $40K. this will START to move into the mainstream. Until then, it is barely a pimple on the industry shipment rates. All the EVs combined make less than half of one percent of the shipments.

    My issue isn't whether or not electric power has a future. My issue is the price of this stock and its trajectory.. It is overvalued by 5-10 times IMHO, and nothing real happens in this space for at least a couple of years. I don't believe there are enough hysterically emotional people to keep propping up this kind of price for 2 years. It is headed for the low triple digits for awhile.

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