During Tesla Motors' (NASDAQ:TSLA) last two earnings calls, one of the most common topics analysts drilled CEO Elon Musk on was demand. When will demand for the company's electric Model S finally level off, or begin to fall?, they wonder. For two quarters in a row, Musk's answer to any question about demand has largely been the same: It's not an issue.
To see just how adamant Musk is about the exceptional demand for its vehicles, consider some of these excerpts from Tesla's third-quarter earnings call:
"... it's not a question of demand."
"It is not our problem."
"...demand is not our issue."
"We have more demand than we can really address."
Broadly, the overarching answer to questions about demand for any supply-limited company is this: Since demand exceeds supply, a company's ability to ramp up production is the only factor that influences sales, not demand. But some skeptics may need a closer look at why exactly Tesla isn't worried about demand to be convinced. On that note, let's explore the driving forces behind Musk's confidence.
Deliveries have nothing to do with demand
Some articles in the media naively make conclusions about Tesla's demand based on estimated deliveries in particular regions. Since deliveries in a given region are only a reflection of production and the timing of shipments to a particular region, these articles, as Musk says, are "nonsense."
Part of the reason why we don't release the monthly deliveries number is just because it varies quite a lot by region and then the media tends to read all sorts of nonsense into deliveries.
We'll have like 1,000 cars reach a country one month and none the next month and then people -- or like 100 the next month trickle in or something because those were the numbers that were registered in one month versus the next -- and people say Tesla sales dropped by a factor of 10. ... [S]o, people read into all these things, which are -- they assume deliveries are proxy for demand, which is not the case. It is the case for other car companies, but in our case it really needs be parsed into orders and deliveries.
Even orders would not be a reflection of demand
Directly following the above statement, Musk went on to explain that even orders are not a true representation of demand for Tesla.
Then, bear in mind, there are lots of things we can do to amplify orders. ... So if we released orders, people would try to read the tea leaves and say demand for Tesla is growing or dropping. No, we're just not pulling the levers that we could pull because there is no point in trying to amplify demand substantially beyond our ability to produce it and deliver it. That would just make people upset.
What sort of "levers" is Tesla not pulling? The company spends zero dollars on advertising, has no paid endorsements, and has a very small footprint of retail stores and service centers (even in established markets). The company has enough unused levers at its disposal that it could probably drive up demand at will.
Still, for the record, Tesla's orders continue to grow faster than production. Tesla said in its Q3 letter to shareholders that demand for the Model S is "accelerating." And in Tesla's Q2 letter, management said the average global delivery wait times were increasing, even as Tesla increases both production and deliveries.
Model X orders are mounting
With orders for its next vehicle, the SUV Model X, now beyond 20,000, the company says it is essentially sold out of 2015 deliveries even though deliveries will begin in Q3 of next year.
This is significant demand once you consider that customers have only seen an early prototype of the vehicle, the car isn't available for a test drive, and the company is trying to "anti-sell" it by persuading customers they should by the Model S.
International markets offer upside
Apparently, the company's near-term international expansion isn't entirely baked into the company's optimistic outlook for demand.
"I wouldn't say we're strongly dependent on China for deliveries next year," Musk said during the call. "In fact, I believe even if we did not sell in China next year, we could probably still meet our targets."
This means that if Tesla can produce more cars than it is planning for next year, expansions to some key international markets could actually offer upside to Model S deliveries.
Tesla's sales are about production, folks -- not demand.
And can Tesla deliver on production? If it continues ramping up the way it has in the past, investors should expect the company to continue to improve production rapidly. With one quarter left in the year, the company is guiding for full-year Model S deliveries to be up 47% over last year. Not bad.
Going forward, Tesla is confident about its ability to increase production. It said in its Q3 letter to shareholders that it can increase production by 50% in 2015, "and probably for several years to follow." Expecting skeptics to still chime in on Tesla's rosy outlook for its fully electric luxury sedan, he adds: "This is unusual in the car industry."
But then again, Tesla isn't a typical auto company.