Tesla Deliveries Mark a Turning Point for Underlying Demand

Tesla Deliveries Mark a Turning Point for Underlying Demand

Tesla shares are up 7% after reporting second-quarter production and delivery numbers well ahead of expectations. Deliveries totaled 95,200 vehicles (77,550 Model 3, 17,650 S&X) vs. expectations of 85k (69k Model 3, 16k S&X). This represents a record for both production and deliveries and a strong sign that the demand for Tesla vehicles, especially Model 3, is as strong as ever.

The crux of the bull-bear debate has shifted from production to demand and, most recently, has fallen on the question of baseline demand for Model 3. How many vehicles can Tesla sell each quarter in a sustainable manner once the “pent up” demand from early adopters and EV enthusiasts has passed?

In the March quarter, Tesla delivered 51k Model 3s, down from the previous high of 63k in Dec-18. This dip in deliveries made a strong case that pent-up demand and tax incentives were the primary drivers of sales. Investors feared everyone that wanted an EV had already bought one and deliveries would continue to fall. The stock was down 22% since reporting those numbers on April 3rd.

Today’s record-high Model 3 production and deliveries should largely put an end to those fears. It’s clear that demand is strong and growing as they continue to enter new markets. This record occurred despite headwinds like a declining US tax credit and trade tensions in China (with help from the tailwind of beginning right-drive deliveries). The March quarter likely marked the end pent up demand for Model 3, but the rebound to this quarter’s higher deliveries (up 52% sequentially) is an indicator that there is growing and sustainable demand.

Additionally, the company indicated a growing order backlog due to orders exceeding production. Tesla expects to further increase both production and deliveries in Jun-19. We interpret these comments as further evidence of growing, sustainable demand, and we expect the company to reiterate its target of a minimum of 360k deliveries for 2019.

As a reminder, Tesla has set ambitious guidance of 360k-400k vehicles delivered in 2019. This quarter brings them to 158,219 total deliveries at the midway point of the year, with 201,781 deliveries remaining to meet the low end of their guidance. That implies about 100k deliveries in each of the next two quarters, so this all-time high needs to be followed up with another record next quarter. That said, investor expectations call for closer to 300k 2019 deliveries, which the company should comfortably exceed.

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