7 Reasons Demand Won't Be an Issue for Model 3

It's easy to get hoodwinked by recent reports surrounding Tesla. Is Elon Musk really in dire straits based on such an abundance of negative Tesla press? Motley Fool's Daniel Sparks argues that while there "are items that might look like good reasons to be skeptical... one facet of Tesla's business investors shouldn't be concerned about is Model 3 demand." To that end, Sparks lays out "seven reasons investors shouldn't worry about demand for Model 3."

Above: Tesla's Model 3 (Instagram: zackkrelle)

1. 455,000 reservations (or more)

For Model 3 reservations, Sparks notes that "the company boasted about 455,000 of them — all backed by cash deposits of about $1,000... [and] not once has Tesla indicated that net reservations for the important vehicle have declined. Indeed, in Tesla's third-quarter shareholder letter last year, management said, 'global net reservations for Model 3 continued to grow significantly' during the period." And on more recent investor conference calls, Tesla affirmed that reservations have remained stable.

2. Demand-generation levers haven't been pulled

Sparks acknowledges, "Not only is the Model 3 unavailable to see in most Tesla stores, but the page of Tesla's website about the Model 3 even pitches the Model S, essentially anti-selling the Model 3. Further, anyone wanting to put in a new reservation today can't even access the online configurator that allows customers to choose options and accurately price their vehicles. That privilege is limited to early reservation holders. And good luck scheduling a test drive."

3. Word-of-mouth hasn't begun yet

Referring to the Model S, Tesla's 1Q 2013 shareholder letter noted, "we are seeing orders in a particular region increase proportionate to the number of deliveries which means that customers are selling other customers on the car." Sparks extrapolates the fact that it's likely the Model 3 "will [also] benefit from word-of-mouth marketing, but potentially to an even greater degree since its lower price point gives it a significantly larger addressable market than the Model S."

4. Model 3 hasn't (yet) gone international

In that same shareholder letter, Tesla wrote, "Given that we have not yet delivered any customer cars outside of North America, there would appear to be significant upside potential in Europe and Asia." Sparks adds that, "International Model 3 deliveries in left-hand drive markets won't begin until mid-2018... [and] Tesla doesn't plan to begin shipping the vehicle to right-hand-drive markets until early 2019. International availability will be yet another lever for Model 3 demand."

5. Demand for the Model S and X also grew rapidly

It's reported that most analysts expected demand for Model S to be capped at 20,000 units. However, "Now, Tesla is delivering more than 50,000 Model S vehicles annually." Furthermore, the estimated 30,000 deposit-backed reservations that Tesla accumulated for its Model X has since grown (in the trailing 12 months) into over 45,000 Model X vehicles sold. It's conceivable we'll see similar momentum after Tesla ramps Model 3 production.

6. Price matters

It's likely high volume Model 3 sales haven't even started yet. The lower-priced base level Model 3 with 220 miles of range won't launch until "late 2018," Tesla's website says. Sparks notes, "Without a $35,000 Model 3 available to order, some potential customers may be waiting until Tesla starts delivering the lower-cost vehicle before they put down $1,000 on a reservation. After all, the standard battery model comes at about a 29% discount compared to the long-range version."

7. Competition could be a catalyst

Even though the Chevy Bolt was first-to-market, "Tesla's Model 3 deliveries are now surging past Bolt deliveries." Sparks argues that, "there's still good reason to believe that this could be a market where a rising tide lifts all boats." In fact, "any new competitor to launch a long-range, fully electric vehicle actually could play a key role in helping Tesla educate consumers about the viability of this alternative to internal combustion engines."

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Source: Motley Fool