In Tesla Motors' (NASDAQ:TSLA) quarterly shareholder letter earlier this month, the electric-car maker highlighted some key insights into what demand looks like for its vehicles. The company's ongoing ability to seemingly increase demand for its cars at will -- even as it refrains from spending money on advertising -- suggests all-electric vehicles have the potential to appeal to a very large market.
Model S demand
For Tesla's Model S, which accounts for the majority of its sales, demand is looking up.
"Model S demand grew globally," Tesla said in its second-quarter shareholder letter.
More specifically, Tesla said Model S orders during the quarter were up 45% compared to the year-ago quarter. And Tesla noted that global order rates for the vehicle had actually accelerated. We also know from Tesla's fourth-quarter shareholder letter that Model S year-over-year order growth in the prior quarter was 35%, "with growth in all regions." So, the sequential increase between Q4 and Q1 in year-over-year Model S order growth rates was meaningful.
Notably, this level of demand for Model S was achieved before the company refreshed the Model S in April with an enhanced look for the front of the car and nearly 300 part changes.
Continued growth in Model S orders is good news for Tesla investors because there was some concern that the company's late 2015 launch of its Model X SUV would result in some cannibalization of Model S sales. But as production of the Model X finally begins ramping up, it appears the SUV might even be a catalyst to overall sales.
Model X demand
With Tesla racking up around 30,000 deposit-backed orders for the Model X by the beginning of the year, the key demand metric the company has been focusing on is its conversion rate of reservations to actual orders.
Management said in Tesla's first-quarter shareholder letter it is satisfied with Model X reservation conversions.
"The growth in Model S orders and the Model X reservation conversion rate support our plan of 80,000 to 90,000 deliveries in 2016," Tesla said in its first-quarter shareholder letter.
It's worth emphasizing that Tesla clearly doesn't seem to be concerned about Model X demand, since it hadn't yet started displaying the SUV in stores or giving to test drives to non-reservation holders during the quarter.
By the end of Q1, Tesla had only produced around 3,200 Model X units. The company will need to continue to ramp up deliveries before it makes a dent in the pent-up demand for the much delayed vehicle.
Tesla hopes weekly Model X production and deliveries will rival Model S deliveries by the end of this year. Currently, Tesla is delivering more than 12,000 Model S units a quarter -- well ahead of Model X quarterly deliveries of 2,400 in Q1.
The Model 3 effect
Many investors wondered how Tesla's unveiling of its Model 3 -- its lowest-cost car yet -- would impact demand for the company's in-production vehicles. With Model 3 deliveries slated to begin in 2017, there were concerns that many Tesla customers might choose to delay purchases and hold off for the less-expensive Model 3? However, after the car garnered around 325,000 reservations in the first week after its unveiling, Tesla management said it believes the new vehicle is actually "stimulating demand for all of our vehicles."
Released on the evening of last day of Q1, Model 3's impact on orders and Model X conversion rates won't be seen until Tesla reports second-quarter results.
Growing demand for Tesla's vehicles is making a compelling case that all-electric vehicles will eventually gain mass-market appeal. Further, Tesla's demand trajectory is helping minimize some of the risk in the growth priced into the stock.