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Is Tesla's Model X Order Conversion Rate Too Low?

By Evan Niu, CFA - Apr 13, 2016 at 10:00AM

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Anyone can now order a Model X and have it delivered next month.

Model X. Image source: Tesla.

Yesterday, Tesla Motors (TSLA -0.57%) opened up its Model X design studio to the public. The vehicle configurator was previously only available to reservation holders. Anyone can now spec out an all-electric SUV, which costs anywhere from $83,000 to almost $152,000.

Not quite first-come, first-serve
When Tesla first invited Model X reservation holders to configure and confirm their orders, the chosen options could meaningfully affect the delivery timeline. In line with its prior practice, Tesla was prioritizing highly optioned configurations first as a way to accelerate the payback period on its manufacturing and tooling investments. Selling the most expensive ones first helps it recoup some of those costs as soon as possible.

The most important variable was the battery capacity. Tesla would prioritize deliveries of the P90D, then move on to the 90D, and then the 70D (which has been upgraded to 75D). Even just choosing the five-seat interior as opposed to the six-seat ($3,000) or seven-seat ($4,000) configuration could push your delivery back a few months.

So you can think of it like the "lowest" priority configuration would be a 75D five-seater. One of those can be delivered as early as June. If that's the case, the two simplest explanations would be that Tesla's production rate has ramped significantly, or the order conversion rate is too low. But we know that Tesla missed its delivery expectations last quarter, and that the company has been gently nudging reservation holders to go ahead and confirm their orders.

A numbers game
As of the end of the first quarter, Tesla had delivered a cumulative total of about 2,600 SUVs. The recall affected 2,700 vehicles, and we're now a couple weeks into a new quarter. Tesla exited the quarter at an X production rate of 750 units per week, which was better than expected. Putting all of that together, Tesla has probably produced approximately 4,100 Model X units cumulatively, although a portion of these are likely still in transit to be delivered.

A line of Model X SUVs waiting to be delivered at the Fremont factory. Image source: Author.

Remember that Tesla was sitting on upwards of 35,000 Model X reservations. So Tesla has probably already worked through over 10% of its order backlog. But if a greater portion of the remaining backlog had already confirmed their orders and entered the production queue, the quoted delivery timeline for new orders should seemingly be farther out.

For instance, even if Tesla has prematurely hit its peak expected production rate of 1,000 X units per week and all of those production slots were taken, that would theoretically represent about 7,000 additional confirmed orders through the beginning of June. Even under those optimistic scenarios, that would represent less than 25% of the approximately 31,000 reservations remaining.

It's unlikely that Tesla has reached 1,000 units per week, and all of those slots are not taken since May deliveries are still available for new 90D and P90D orders. So the X order conversion rate could easily be under 20% right now.

Why it's too early to worry
While a potential sub-20% conversion rate doesn't inspire confidence in Tesla's latest and greatest EV, there is a few possible explanations.

It's quite likely that many of those reservation holders are waiting to test drive the vehicle before confirming their order. Some reservation holders may also be waiting for Tesla to work out early quality issues, and there undeniably are a few examples of low-quality deliveries.

Putting a refundable $1,000 Model 3 reservation deposit down sight unseen is quite different than confirming an order for an $80,000 car you've never personally experienced. Once you confirm the order, the $5,000 Model X deposit is no longer refundable.

This is precisely what the "Meet Model X" tour was for: to allow reservation holders to test drive. But even the tour can't possibly allow all reservation holders to see the car. That's why it's so important to get Model X into Tesla showrooms as soon as possible. My local Park Meadows store in Denver just got their X last week.

As the production ramp increases, it will take some time to get display and test drive vehicles distributed. But as more and more reservation holders set up their test drives, hopefully that translates into more and more confirmed orders. Meanwhile, Tesla has started giving review units to the media, and the subsequent positive reviews will also stimulate demand.

The X order conversion rate has nowhere to go but up.

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