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Tesla, Inc. Sees Surprising Demand For Model S and X

By Daniel Sparks - Feb 22, 2018 at 8:07AM

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The Model 3 still isn't cannibalizing demand for the Model S and X. In fact, it's doing just the opposite.

When electric-car company Tesla (TSLA 4.53%) announced it would sell its Model 3 with a starting price at about half of the starting prices of its Model S and X, one of the biggest concerns was whether the new vehicle would cannibalize sales of the older models. So far, the opposite has been true. In fact, wait times for Tesla's Model S and X are now increasing even as their production remains stable.

A growing backlog of Model S and X orders

With expected times for new Model S and X orders typically bouncing between about one to two months based on factors like prioritization of deliveries in different global markets, reducing inventory vehicles, or the introduction of new features, some variation in wait times is normal.

Tesla Model X in a garage with its falcon wing doors open

Model X. Image source: Tesla.

But now wait times for both the Model S and the Model X have slipped to June at the time of this writing, or about four to five months.

Tesla confirmed with The Motley Fool that the unusually long wait times for the two vehicles are not a reflection of lower production, but instead due to a growing backlog of customer orders. 

Tesla called it

In its fourth-quarter shareholder letter, Tesla predicted this would happen.

Finishing 2017 with just over 100,000 combined Model S and X deliveries during the year, management said it planned to keep annual production of the two vehicles stable, aiming for about 100,000 Model S and X deliveries during the year. Production would be "constrained by the supply of cells with the old 18650 form factor" as Tesla chose to refrain from commissioning battery partner Panasonic to build additional capacity. But Tesla said it still expected demand to grow beyond this annual 100,000-unit run rate.

Three Tesla vehicles charging at a Supercharger location

Model X and S vehicles at a Tesla Supercharger. Image source: Tesla.

"As our sales network continues to expand to new markets in 2018, we believe orders should continue to grow," Tesla explained. "With demand outpacing production, we plan to optimize the options mix in order to maximize gross margin."

Now that demand for Model S and X has resulted in a significant customer order backlog, Tesla just needs to follow through with its plans to optimize the options mix for the two vehicles. This could mean the inclusion of more features in the base models for the Model S and X, along with higher starting prices. But it could also mean the introduction of more high-end features or simply greater prioritization of delivery windows of highly optioned Model S and X units.

The Model 3 effect

Though some higher demand for the Model S and X could simply be a byproduct of Tesla's delayed timeline for Model 3 production, there's also some evidence that the buzz generated by Model 3 is driving demand for Tesla's Model S and X.

Model 3 interior and 15-inch touch display

Model 3. Image source: Tesla.

In its fourth-quarter shareholder letter, Tesla explained how the Model 3 is boosting demand for its products:

Importantly, combined orders for Model S and Model X grew significantly in 2017 compared to 2016. There had initially been concerns about whether Model 3 would cannibalize Model S and Model X. It seems the opposite is true. In stores where Model 3 is on display, customer foot traffic has increased considerably and orders for Model S and Model X have in fact increased. There has been an even bigger increase in solar and Powerwall sales.

This has happened even as hundreds of thousands of net reservations for the Model 3 impressively remained stable amid production delays. Furthermore, Tesla said in the weeks leading up to its fourth-quarter shareholder letter that net reservations for the Model 3 resumed their upward climb.

Despite Tesla's optimism about the positive impact of Model 3 on demand for its pricier vehicles, the real test of cannibalization will come once Model 3 production ramps up to the 5,000-unit-per-week target Tesla is aiming for by the end of its second quarter. Once Model 3 wait times come down as production increases, potential Model S and X customers may be more compelled to buy a Model 3 instead.

For now, a growing backlog of customer orders for the Model S and X is a good sign for investors -- and it gets Tesla a step closer to prioritizing higher-margin Model S and X deliveries.

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