While the fiery arguments over the valuation of Tesla (NASDAQ:TSLA) rage on, certain simple and irrefutable aspects shouldn't even be a matter of debate -- especially among analysts.
Tesla is under self-ordered investigation for two battery fires with his vehicles. CEO Elon Musk hopes to clear the company's name and alleviate safety concerns. Some observers argue that it's human nature to fear new technologies, and the bad publicity will dampen demand regardless of the outcome. Others say that there's no such thing as bad publicity, and all of the attention being put on Tesla by the media is actually increasing awareness, which will ultimately increase demand.
Both sides are missing the point. Compared to the company's production capacity, the demand for Tesla's cars is so strong that each vehicle is sold literally before Tesla even starts making it. Given this, it came as quite a surprise to me when Barclays analyst Brian Johnson cut his sales estimate for 2014 by 10% in response to the fire investigation.
Johnson gave examples such as Toyota and Audi, which saw 10% to 20% drops following past concerns over safety. The problem with that argument is that a 10% to 20% drop in demand for Toyota and Audi is much more meaningful than it is for Tesla.
Tesla has made it clear that it has a production problem, not a demand one. Even if you were to curb 10% or 20% or maybe even 30%, 40%, and 50% off demand for Tesla's cars, at this point you'd only potentially reduce current customers' time on the company's waiting list.
The demand side
Tesla has stated that it has been primarily relying on word of mouth -- no advertising, endorsements, or anything similar. Since it has only sold 19,000 cars so far, that's not even a lot of mouths, especially since that sales figure is spread across 20 countries.
Yet word of mouth is apparently working. Tesla is breaking new records in the number of test drives from potential customers every single week. In the company's latest conference call, Musk explained that Tesla had to put North American customers on hold to alleviate some of the European wait, because some of those customers have been waiting two to three years as it is.
Based on orders, Musk says there's already demand for more than 20,000 vehicles a year in North America and another 10,000 in Europe. In China, there's already a six-month wait, and "it looks like that wait time may be accelerating" according to Musk. With Musk's expectation of 60% of the company's 2014 demand coming from abroad, that adds another 20,000 vehicles in Asia and elsewhere, for a total demand for 50,000 vehicles in 2014.
Musk was most clear when he stated, "I think there is a huge amount of untapped demand in North America." Demand is not an issue going into 2014, even if the negative publicity cools it off a bit – or even a lot.
The production side
Last quarter, Tesla reported $603 million in non-GAAP revenue with a bit over 5,500 deliveries. This comes out to around $109,000 average revenue per vehicle.
As of Nov. 5, Tesla is producing 550 vehicles a week. That already works out to annual revenue of $3.12 billion, yet analysts have 2014 revenue pegged at $3.1 billion -- even before next year's production begins to kick into high gear.
As Musk has previously stated:
So that's where we are really spending our time line, is clearing up those production bottlenecks or supply chain bottlenecks. I think we should have probably cleared most of the amount in the next six months. Maybe into Q1, Q2, we should, certainly by Q2, I think with a fair amount of production potential. Then we will see what the demand looks like at that point. But we are striving to become demand limited as opposed to production limited.
If Musk's prediction proves correct, this suggests the 25,000-car production rate for the second half of 2014 would, if annualized, come close to meeting an annual demand for 50,000 Tesla cars.
Add that 25,000 to the expected production for the first half of 2014, and at the current rate of 550 per week, you get 14,300 vehicles, for a grand total of 39,300 vehicles in 2014.
At $109,000 average per vehicle, even that smaller sales figure works out to revenue of around $4.3 billion, blowing away analysts' estimates. And this estimate assumes zero increase in production from November 2013 to June 2014, suggesting that the ultimate revenue jump certainly could be higher.
In contrast to Tesla's sales expectations, Johnson estimates car sales of 29,663 for 2014, which is barely above the 550-per-week rate now. Tesla, at that pace, still has to ration out production and make customers around the globe wait much longer than they'd like.
Since Tesla is a company that habitually beats its own guidance in virtually every metric, it seems like it would take either a demand or production shortfall far below the company's expectations to sell only 29,663 cars next year.
Foolish final thoughts
Follow the analyst estimates, and don't be surprised if one of two things happen in this Fool's opinion: either those estimates will gradually rise, or they'll get blown out of the water. Whether Tesla ultimately proves to be a great buy or a sell from current levels remains to be seen -- but the first step in making that call demands that we calculate more realistic sales figures for the months and years ahead.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.