When it comes to Tesla's (TSLA -1.06%) business, there are a number of things that should concern investors. For instance, CEO Elon Musk's promise of profits in the second half of this year has a major contingency: The automaker will need to more than double its current weekly Model 3 production rate in just three months.
Then there's the fact that in Tesla's most recent quarter, the automaker posted its worst-ever quarterly loss. Achieving profits this year, therefore, will require extraordinary execution on Tesla's part. Finally, Tesla's wild valuation, including its price-to-sales ratio of 4.2, means the company needs to deliver uncanny growth for years to come.
But there also are items that might look like good reasons to be skeptical on the surface, but aren't as worrisome after a closer look. One facet of Tesla's business investors shouldn't be concerned about is Model 3 demand, despite initial production delays that may have sparked some Model 3 reservation holders to cancel their reservations.
Here are seven reasons investors shouldn't worry about demand for Model 3.
Model 3. Image source: Tesla.
1. Tesla has hundreds of thousands of deposit-backed reservations
The first reason Tesla's Model 3 demand isn't a concern is obvious, but still worth consideration: As of Tesla's last update on Model 3 reservations, the company boasted about 455,000 of them -- all backed by cash deposits of about $1,000, depending on the market in which the Model 3 was reserved.
Though this figure was provided last summer, not once has Tesla indicated that net reservations for the important vehicle have declined. Indeed, in Tesla's third-quarter shareholder letter last year, management said, "global net reservations for Model 3 continued to grow significantly" during the period.
Further, in Tesla's recent fourth-quarter update, management noted that reservations remained stable during the quarter and resumed growth in the weeks leading up to the release of its fourth-quarter shareholder letter, prompted by debuting the Model 3 at select Tesla stores. Finally, in Tesla's first-quarter update on deliveries and production, management said net Model 3 reservations remained stable during the period, despite "delays in availability of certain planned options, particularly dual motor AWD and the smaller battery pack."
Maintaining reservations at this level, even as the automaker is running about six to nine months behind its initial schedule for Model 3 deliveries, is quite an achievement.
2. Tesla isn't pulling any significant demand-generation levers
Not only is the Model 3 unavailable to see in most Tesla stores, but the page of Tesla's website about the Model 3 even pitches the Model S, essentially anti-selling the Model 3. Further, anyone wanting to put in a new reservation today can't even access the online configurator that allows customers to choose options and accurately price their vehicles. That privilege is limited to early reservation holders.
Model S. Image source: Tesla.
And good luck scheduling a test drive. At the time of this writing, anyone who tries to schedule a Model 3 test drive on Tesla's website will only get two vehicle options: Model S and X.
3. Word-of-mouth marketing hasn't had a chance to ramp up
In the past, word-of-mouth marketing has proven to be Tesla's best lever for vehicle demand. Indeed, that's how Tesla has managed to avoid paid advertising all this time, opting instead to focus marketing efforts on referral incentives. But since Tesla only has delivered an estimated 15,000 Model 3 vehicles -- a fraction of the hundreds of thousands of reservations for the car -- word-of-mouth marketing hasn't had a chance to materially impact demand yet.
Tesla explained how word-of-mouth marketing was working in its favor shortly after its Model S was launched. "Importantly, we are seeing orders in a particular region increase proportionate to the number of deliveries," Tesla said in its first-quarter shareholder letter in 2013, "which means that customers are selling other customers on the car."
Similarly, the Model 3 likely will benefit from word-of-mouth marketing, but potentially to an even greater degree since its lower price point gives it a significantly larger addressable market than the Model S.
4. International Model 3 availability hasn't ramped up yet
Directly following Tesla's above statement in its first-quarter shareholder letter in 2013 about the impact of word-of-mouth marketing, management proceeded to infer what this could mean for overseas demand for the Model S: "Given that we have not yet delivered any customer cars outside of North America, there would appear to be significant upside potential in Europe and Asia."
Virtually all of Tesla's Model 3 deliveries so far have been in the U.S. International Model 3 deliveries in left-hand drive markets won't begin until mid-2018, the company says on its website. In addition, Tesla doesn't plan to begin shipping the vehicle to right-hand-drive markets until early 2019.
International availability will be yet another lever for Model 3 demand.
5. Demand for Model S and X has never been a problem
Few believed Tesla when it projected in its 2012 second-quarter shareholder letter (released about a month after the automaker started delivering its Model S) that its "accelerating pace of reservations makes us confident that demand will surpass 20,000 Model S units for full year 2013 deliveries." But Tesla's 2013 Model S deliveries surpassed 22,000 units. Now, Tesla is delivering more than 50,000 Model S vehicles annually.
Model X. Image source: Tesla.
Similarly, the estimated 30,000 deposit-backed reservations Tesla had garnered for its Model X SUV by the time it launched in 2015 proved to be a conservative indicator of demand. In the trailing 12 months, Tesla has delivered over 45,000 Model X vehicles.
Even as Model 3 production ramps up, Model S and X demand remain "very strong," Tesla said in its April 3 update on vehicle deliveries and production. Indeed, net orders for Model S and X were at an all-time first-quarter high, management said.
6. Price matters
Though the Model 3 is supposed to eventually start at $35,000, it doesn't yet. Currently, the only version of Model 3 available for customers to order is the $49,000 long-range version of the vehicle. The standard battery Model 3, with 220 miles of range and standard equipment, won't launch until "late 2018," Tesla's website says.
Without a $35,000 Model 3 available to order, some potential customers may be waiting until Tesla starts delivering the lower-cost vehicle before they put down $1,000 on a reservation. After all, the standard battery model comes at about a 29% discount compared to the long-range version.
7. Competition could prove to be a catalyst
Fully electric vehicles still are a niche market, representing only a fraction of global auto sales. Considering the rapidly rising demand for fully electric vehicles and their small share of the auto market, any new competitor to launch a long-range, fully electric vehicle actually could play a key role in helping Tesla educate consumers about the viability of this alternative to internal combustion engines and hybrids.
To this end, rising competition in the space hasn't proven to negatively impact Tesla yet. Consider that, even though General Motors (GM -0.47%) announced its comparably priced, fully electric Chevrolet Bolt before Model 3 -- and started shipping it before the Model 3 -- Tesla still managed to accumulate hundreds of thousands of Model 3 reservations. Further, Tesla's Model 3 deliveries are now surging past Bolt deliveries, particularly now that the automaker recently maintained weekly production rates above 2,000 units per week for three weeks straight.
Without any real evidence yet to suggest competition will eat into Tesla's market potential, there's still good reason to believe that this could be a market where a rising tide lifts all boats.
Investors have good reason to be skeptical about Tesla's ability to live up to its wild valuation. But demand for Model 3 is not one of them.
