This week Pacific Crest Securities analyst Brad Erickson published a research note raising some concerns about demand for Tesla vehicles as we head into the final three months of 2016.
Demand is a hot-button issue for Tesla because for years CEO Elon Musk and his team have insisted that the automaker isn't "demand constrained," but rather is "production constrained."
The issue isn't that not enough people want a Tesla; it's that Tesla can't currently build enough vehicles to serve demand and doesn't want to force buyers to wait. On several occasions, Musk has even said that Tesla has intentionally held back on stoking demand to avoid overstressing its manufacturing operations.
The demand question seemed to have been put to rest for good when after the reveal of the Model 3 mass-market vehicle in March, Tesla racked up 375,000 advance deposits for the car, at $1,000 a pop.
But analysts continue to fret over the demand environment for Tesla. For his part, Erickson isn't really a Tesla bull or bear; he makes a $190-per-share case as the most realistic, but accounts for a $400 bull case and a $120 bear case. The stock is now trading slightly above $200.
Erickson is concerned about demand, however. The "quality of incremental Model S demand gives us pause," he wrote, adding that "Tesla is tracking to the low end of its previously stated delivery target of 80,000-90,000 for 2016, it is using various discounting mechanisms to do so, which is cause for worry."
Tesla sells its cars for pretty high prices — more than $100,000 on average — so the company has room to discount and still hold a good margin (even though it doesn't show a quarterly profit because it's investing so heavily in the company right now).
But Erickson makes another point that contrasts with what Tesla says it's been doing with cheaper versions of the Model S sedan.
"[I]t appears that Tesla is pulling forward significant Model 3 demand to support Model S sales," he wrote. "Based on our checks, we think as many as a third of current Model S orders are coming from Model 3 reservation holders opting for the newly created two-year (and less expensive) lease and, of course, the 60 kWh [battery option]."
Demand on top of demand
Tesla told me when it brought out the cheaper Model S earlier this year that it actually wasn't aiming to sell an S to anyone who didn't want to wait for their 3. Instead, Tesla saw an uptick in interest in the Model S after the Model 3 unveiling, but also heard that potential buyers were interested in a less expensive S. So Tesla started selling the 60 kWh version of the Model S, which is in fact a 75 kWh vehicle that's limited by software at 60 kWh pricing.
But even if Erickson is onto something and Model 3 reservation holders are going for a least costly Model S, then that's sort of demand on top of demand for Tesla. A customer gives you $1,000 to hold a 3, and while they're waiting, goes ahead and pulls the trigger on a $66,000 Model S.
Perhaps the assumption is that those 3 reservation holders cancel, but Tesla probably expects that to happen anyway, to a degree. Better that they buy a Tesla now, then, rather than purchasing something else — like a gas-powered luxury car!
Tesla can't have infinite demand for its existing vehicles. At some point, it will tap out and have to introduce new models, which it's doing, or wait around for trade-ins to get owners into a newer car and satisfy fresh demand for pre-owned vehicles.
But for now, as Tesla head towards its best-ever year for sales, it doesn't appear that it yet has any major demand concerns.
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