On Thursday night, electric-car maker Tesla Motors (TSLA -1.26%) unveiled its long-awaited lower-cost car, or its Model 3. And initial demand for the vehicle, illustrated by the Model 3's growing number of reservations, has been nothing short of astounding. Here's some context on these reservation numbers and what they mean.
Model 3. Image source: Tesla Motors.
Defining "reservation"
For customers to reserve a Model 3, they need to put down $1,000 in the United States. Amounts vary from region to region and are in different currencies, but are all equivalent to $1,000 or more. Further, these reservations are refundable until customers are asked to confirm their order, a step that will occur closer to production.
It's also important to emphasize that these reservations are for a vehicle that Tesla doesn't plan to start delivering until the end of 2017.
Reservation count
- Before the company even showed the Model 3, and in less than 24 hours, deposit-backed reservations for the vehicle had surpassed 100,000.
- After 24 hours of accepting reservations, the 3's reservation count hit 180,000.
- As of Friday morning, Musk said reservations were still climbing and had hit 198,000.
- As of Friday night, Tesla's Model 3 reservations hit 232,000.
Why 232,000 is a significant milestone
Make no mistake: Tesla's ability to garner 232,000 orders for Model 3 in just over 24 hours is good news for investors. For perspective, the company sold just over 50,000 vehicles during 2015 and plans to sell just 80,000 to 90,000 vehicles this year. So 232,000 reservations for a new vehicle in such an incredibly short timeframe makes an excellent case for the demand for a compelling fully electric vehicle at a more affordable price point.
The 10,000-foot view
Tesla definitely expected high demand for Model 3. But not like this.
"Thought it would slow way down today," Musk said on Twitter on Friday morning. "Recommend ordering soon, as the wait time is growing rapidly."
"Definitely going to need to rethink production planning," he said in a follow-up Tweet.
Tesla was already planning on extraordinary growth. The company has repeatedly articulated to investors it intends to ramp up production to 500,000 vehicles per year by 2020.
Tesla's Fremont factory building is large enough for Tesla to build out capacity for up to 500,000 vehicles per year. Image source: Tesla Motors.
But initial demand for Model 3 finally validates the demand side of the equation in Tesla's bullish forecasts for vehicle sales. With the company able to generate 232,000 orders for a $35,000 vehicle in just over 24 hours -- Tesla could feasibly generate more than half a million reservations by the end of this year for Model 3 alone. And with a monstrous backlog of orders like this, it could take years for the company to catch up to demand.
Of course, if a competitor launches a more compelling product, Model 3 reservation holders could opt to cancel their reservations and buy a different vehicle. Still, this sort of initial demand leaves room for competition in Tesla's demand story.
With Tesla's demand story looking up, investors will now turn their focus to production. Will the electric-car maker be able to follow through and truly ramp up production to 500,000 annually by 2020?
