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Proof That Demand for the Tesla Motors, Inc. Model S Is Healthier Than You Think

By Nickey Friedman - Feb 13, 2014 at 8:00PM

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This new indicator to watch will help you predict future demand.

Demand has been so strong, you would think that Tesla (TSLA 4.88%) had the most popular commercial aired during the Super Bowl. Nope, Tesla has still refused to spend a single dime on advertising. If there was any concern about value and demand of Tesla's electric cars, there is a new indicator should quickly remove any last doubt.

Tesla draws a crowd. Source: Tesla Motors

The production and demand imbalance
Not to beat a dead horse, or a dead gas-powered car, but as I and other Fool contributors have mentioned many times, demand for Tesla's vehicles is far greater than production. As CEO Elon Musk put it, "We really are production constrained not demand constrained." 

The result is a long wait for customers around the world from the time of orders until the time of delivery. Tesla even has had to ration out deliveries to different parts of the world to avoid the waits getting too, too long -- such as in Europe where in some cases customers have been waiting for two to three years. This means the company had to put some North American customers on hold.

The new indicator
But the long wait times don't necessarily mean sales will be higher over time. It could be argued that this backlog of orders stems from a time when production was a fraction of its current rate. Perhaps production is just now catching up and the outstanding order flow will level off, right? Not so fast.

Basic economics teaches us that if there's a true demand and supply imbalance above and beyond current market rates, then the true "fair market" price equilibrium is something higher, possibly much higher. In the case of Tesla according to a new report from iSeeCars, its used cars sell for more than its new cars.

In case it's not obvious, this means that Tesla is underpricing its vehicles versus what it could charge and demand is truly much higher and can be supplied in much greater quantities. Let's face it: Vehicles, not even those made by Tesla, aren't like fine wine. They generally don't improve or appreciate with age. People are obviously so desperate to get a Tesla Model S that they're willing to pay a premium to get their hands on one right away, even if it's used and has less intrinsic value than a brand-new one.

Tesla and China
Tesla announced that it was pricing its cars in China at the exact same level as it does in the rest of the world even though it could get away with double that amount following standard auto industry practices. Tesla wants to be seen and known as a company that does things differently, and all the different things that Tesla does keeps headlines about the car company on the front page. The company doesn't spend a cent on advertising, so one could argue that all those headlines serve as a form of advertising.

Musk noted in a tweet that the used car prices are evidence that the car values are holding up. While I agree with almost everything Musk tends to say, on this I'd disagree. Used car prices offer far more evidence of underpricing in the first place rather than value holding up. Put another way, if you had two virtually duplicate Tesla cars to sell and one was brand new and the other had, say, 1,000 miles on it, it would be quite a stretch to assume the used one would fetch the same price let alone a higher price. The premium for a used Tesla likely means that you can get it today and not have to wait in line for long time, and most people would rather just pay more than wait a long time.

Foolish final thoughts
The premium for used Teslas suggests that, if the new ones were available immediately, the "true" market price would be much higher. For Tesla, it's almost exclusively a race to see how fast it can ramp up production while keeping the profit margins of that production as high as possible (and maintaining quality and safety in the process). For investors, it's a watch-the-production game more than anything else as well. Tesla still has a long way to go to justify its current stock price, but if production capacity gets much larger it's possible for that to happen. We will know more about current and projected production when Tesla reports officially next week.

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