"We have long contended that Tesla's primary challenge is, and will continue to be, lack of demand for its electric vehicles," said Bank of America Merril Lynch analyst John Lovallo, who has a price target of $65 for Tesla (TSLA +3.01%) stock, in a note to investors in February. This is the same analyst who wrote about Tesla's 3,000 "unsold" cars -- a topic he has avoided returning to after Tesla's record quarter.
Lovallo's new attack on Tesla's demand story is quite confusing in light of Tesla's soaring sales, and even more puzzling with Tesla asserting the exact opposite about demand for the Model S. So, does Tesla have a problem with demand, or not?
Let's take a deeper look at exactly why Lovallo believes demand for Tesla's vehicles is weaker than the company lets on to see if the logic adds up.
Model S. Source: Tesla Motors.
Does Lovallo's crux make sense?
Tesla is "producing at levels that are both well below past run-rates and the company's current installed capacity" in order to fabricate "the appearance of rising demand outstripping supply," Lovallo argues. This point is key to his underlying thesis about Tesla's demand. But is Tesla's decision to run its business this way really a sign of weak demand?
In his own report, Lovallo provides the very reason Tesla is producing at levels below its installed capacity:
In our view, the big question is why Tesla would not produce at full installed capacity (or higher by adding additional weekend shifts) if demand was actually as robust as the company suggests? Tesla's response to this question is that a heightened focus is being placed on manufacturing and procurement efficiencies.
But this answer isn't good enough for Lovallo. Forget a heightened focus on manufacturing and procurement efficiencies, Lovallo argues; if Tesla's gross profit margin for its auto business is as good as the company says it is, Lovallo thinks Tesla should produce as many cars as possible.
Tesla shareholders should view Lovollo's criticism of Tesla's decision to produce at levels below its installed capacity skeptically. Falling short a few hundred extra cars in a quarter in order to perfect manufacturing and procurement efficiencies is the long-term approach investors should want Tesla to take. Efficiencies achieved today could pay off exponentially later on in light of Tesla's goals to produce 500,000 vehicles per year by 2020.
Tesla doesn't need to fabricate the appearance of growing demand
And to imply Tesla is trying to create the appearance of demand doesn't acknowledge the facts Tesla has provided to investors. A look at everything we know about Tesla's growing orders and deliveries clearly shows demand for Model S isn't leveling off.
First, consider that Model S deliveries soared 41% in 2014. And in Tesla's most recent quarter, Model S sales were 26% higher than any quarter yet. Such a substantial jump in deliveries wouldn't have been possible without a growing number of orders; we know this because during this time, the global wait times for Model S customer orders has remained near the same three-month level and the same one-month level for orders of the flagship performance version. Demand for Model S is clearly on the rise.
Tesla displays its dual motor all-wheel drive Model S. Source: Tesla Motors.
Second, take a look at the orders for Model S. Fortunately, Tesla provides a handful of information on orders. Here are a few tidbits from Tesla's fourth-quarter letter to shareholders:
- Tesla entered 2015 with over 10,000 orders for Model S, and essentially sold out of Q1 deliveries before the quarter even started.
- Tesla had record orders for Model S in Q4.
- As Tesla's all-wheel drive dual-motor cars become available in Q1 for customer test-drives, Tesla believes this will be a catalyst for even higher levels of orders.
- While North American deliveries in 2014 were flat compared to 2015 as Tesla delivered about 45% of its cars to newer and less-established markets in Europe and Asia Pacific, Model S orders increased in North America year over year.
And while not as recent, but fresh enough to be useful, Tesla said in its third-quarter letter to shareholders that it is confident Model S net orders and deliveries will increase by 50% in 2015. Assuming 50,000 deliveries of Tesla's guidance for 55,000 deliveries in 2015 are planned to be Model S cars (the other 5,000 would be initial deliveries of its Model X), it appears that more than a month into 2015, Tesla's order trajectory for the Model S still gives Tesla the confidence to keep this forecast.
Looking at the big picture
To correctly view Tesla's rising demand, investors need to zoom out and look at the big picture. In light of the general trajectory of orders and deliveries, the only way Tesla could be intentionally trying to create the appearance of demand for its vehicles is by downright cooking the books because Tesla has painted a clear picture of rising demand for Model S.
Sure, there will come a time when the sales growth of Model S units each year finally stops. But the best knowledge we have of demand today is Tesla's guidance and its openness about Model S orders. And even if global annual Model S demand does soon level off, Tesla still has tools at its disposal to attempt to reinvigorate sales growth -- e.g., begin paying for advertising (a strategy traditional auto manufacturers have used for over a century), be more aggressive about opening new stores and service centers, or consider partnerships with high-end dealers.
In perfect contrast to Lovallo, who has "long contended that Tesla's primary challenge is, and will continue to be, lack of demand for its electric vehicles," I believe Tesla's primary catalyst, is, and will continue to be, fast-growing demand for its electric vehicles.
