Tesla Motors' (TSLA 3.17%) second-quarter deliveries increased 25% year over year, highlighting the electric-car maker's ongoing growth story. But one key metric paints quite a different picture: Model S deliveries. For two quarters in a row, Tesla's Model S deliveries have been declining sequentially. Should investors worry?

Model S. Image source: Tesla Motors.

Model S deliveries

The trajectory of Model S deliveries in Q2 was undoubtedly downward. Not only were Model S sales down 22% sequentially, but they were down 15% year over year. Further, this follows a 28% sequential decline in Model S sales in Q1. This trend contrasts with the consistent, strong growth the model was driving for Tesla since the vehicle was introduced in 2012.

Data for chart retrieved from quarterly Tesla SEC filings and press releases. Chart source: Author.

Despite declining Model S sales, Tesla has been able to maintain year-over-year growth in total vehicle sales during this period thanks to the September launch and subsequent production ramp of Model X. But the severity of Tesla's declining Model S sales means that even with increasing Model X production, Tesla's total vehicle sales are actually declining on a sequential basis recently. In Q1 and Q2, Tesla's total vehicle sales declined 15% and 3%, respectively.


There could be several reasons for declining Model S sales.

First, adding Model X to Tesla's production is likely making Model S production more difficult.

"[S]ince Model S and X are produced on the same general assembly line, Model X production challenges could slow Model S production," Tesla warned in a quarterly letter to shareholders last year.

While Model X production has been ramping quickly, it's meaningfully behind what the company was expecting. Model X production challenges, therefore, may likely be negatively affecting Model S production.

Second, demand for Model S could be plateauing. Sure, demand for Model S is higher on a year-over-year basis. In Q1, Tesla said orders for Model S increased 45% year over year. But there's a possibility orders for Model S may no longer be growing sequentially. If this is the case, Tesla is likely hoping its April-launched refreshed design to the front of Model S, as well as Tesla's June introduction of a less expensive Model S, will be a boon to Model S demand.

Data for chart retrieved from quarterly Tesla SEC filings and press releases. Chart source: Author.

Finally, Model X may be cannibalizing some Model S sales. Initially, Tesla emphasized that the Model X's introduction was actually a catalyst for Model S sales, but the contrasting trajectory of the two models' deliveries strongly suggests there is at least some cannibalization going on now.

Investors may want to keep an eye on the trajectory of Model S sales as the year goes on. If sequential declines in the model's deliveries continues, that could suggest that current annualized levels of Model S deliveries are not sustainable.

In the interim, investors can at least take comfort in the company's recent bullish update on total expectations for S and X deliveries combined. Tesla said in its second-quarter press release for vehicle deliveries that "[c]urrent order rate trends and backlog," along with Tesla's production expectations, are pointing to around 50,000 deliveries in the second half of 2016 -- nearly equal to the company's total deliveries in the entire year of 2015.