The Street loves to gobble up noise. In the last few days, it had its fair share related to Tesla Motors (NASDAQ:TSLA) stock, sending shares up and down like a roller coaster. Yesterday, Tesla shares fell almost 6%. Today, at the time of this writing, they are up more than 9%. Here's what you need to know.
Like clockwork, leading up to every Tesla quarterly earnings report, someone comes out and frets that the electric-car maker's sales are going to come in shy of expectations. As usual, the logic behind the report is completely flawed.
While Tesla CEO Elon Musk has already debunked this quarter's report in a tweet, the fiasco is still worth a closer look given the wild volatility created in Tesla's stock price from all this ruckus.
The noise that moved Tesla stock yesterday
"Tesla Motors' stock price fell as much as 5% early Monday on an unconfirmed report that the company's sales were down," read an article published yesterday at Investor's Business Daily by James Detar.
Readying my keyboard to begin my typical quarterly debunking on why sales for a supply-limited company are not a reflection of demand (orders are, but we will get to that later), the next sentence in the article left me scratching my head and wondering if the sell-off really was connected to this observation.
"Word spread that Wards Automotive, which covers the auto industry, had reported Tesla Motors sales [in the U.S.] were down 26%, but a Wards editor said that he was unaware of any such story," Detar continued.
So, was the report unconfirmed or was it confirmed to be a useless rumor?
Whatever the case, the Wall Street Journal picked up on the story later that day. With the Journal on the story, nearsighted investors officially got in a tizzy.
Making matter's worse, the Journal's Mike Ramsey added more negative tone to the matter by highlighting a WardsAuto quote in large letters that suggested that a decline in Tesla sales in the U.S. is related to demand, not a simple temporary reshuffling of deliveries of Tesla's limited supply.
But as it turns out, WardsAuto's figure for U.S. sales during the quarter is wrong. Furthermore, WardsAuto's suggestion that a decline in sales is a reflection of a decline in demand is even more wrong (though it didn't take a tweet from Musk to understand this).
Article in @WSJ re Tesla sales is incorrect. September was a record high WW and up 65% year-over-year in North America.— Elon Musk (@elonmusk) October 28, 2014
Stop worrying about quarterly sales
Estimating the trajectory of Tesla's sales over the long haul is obviously important, given the very forward-looking price tag for the company's stock. But worrying about Tesla's sales for the immediate quarter is a waste of time.
Why? Because Tesla's demand is running far ahead of its supply. This renders sales in each quarter only a reflection of the electric-car maker's potential quarterly supply (which can fluctuate from quarter to quarter as Tesla fills its international pipelines), not a reflection of demand.
Realizing the media is repeatedly making irrational connections between sales estimates in the immediate quarter and demand for Tesla's vehicles, the company attempted to explain the situation in its most recent quarterly letter to shareholders.
At Tesla, we see a clear distinction between demand and deliveries. We measure demand by the number of cars that have been ordered. An order occurs when a customer selects their vehicle configuration and pays the nonrefundable cash deposit. Deliveries, on the other hand, are the fulfillment of those orders.
Next, Tesla went on to explain the real drivers of sales in the immediate quarter, none of which is demand.
The number of deliveries in a quarter is influenced by three main factors: our ability to increase production; the allocation of that production among our North American, European and Asian markets; and the need to fill the in-transit pipeline for future deliveries in each region.
Just in case the media was still not convinced, Tesla followed with even more perspective.
However, even though we increased both production and deliveries, average global delivery wait times increased because our production growth was unable to keep pace with increased demand.
Model S orders, and thus demand, continue to grow even in our most established markets. In both North America and Europe, Q2 Model S orders increased sequentially at a much faster rate than for the rest of the automotive industry. Accordingly, we believe these markets remain under-penetrated.
So, Haig Stoddard of WardsAuto, if there were a sales decline, it would not be attributable to the Model S being a niche product.
Even more, I'll go out on a limb and make my own prediction, one that goes contrary to all the noise about Tesla's "demand" problems: Tesla will proceed to meet or exceed its year-end target for 35,000 global deliveries -- a figure that is up 56% from last year's sales.