- Tesla has received a high number of Model 3 pre-orders that have exceeded all expectations.
- The order frenzy seems to be driven by the vehicle's better-than-expected specs.
- Model 3 holds excellent revenue potential for Tesla and could help drive the stock to fresh highs.
Coming into the expected launch of Model 3 on March 31, Tesla (NASDAQ:TSLA) stock was a real battleground with the bulls fervently hoping that the new vehicle would not disappoint while the bears waited to pounce at any fumbles by Tesla. And, the bulls have come out winners yet again. Tesla unveiled Model 3 as expected, and it revealed some unexpected nuggets on both features and driving range including an EPA-rated 215 miles range, autopilot hardware, supercharging, ability to comfortably seat five adults, and 0-60 mph acceleration in less than six seconds. The world appears smitten with the first mass-market EV, and barely two days later Elon Musk tweeted that pre-orders had hit 253k units, adding that he had only anticipated,
Maybe 1/4 to 1/2 of what happened. No one at Tesla thought it would be this high before part 2 of the unveil.
The part 2 unveil that Musk is talking about here refers to the second Model 3 launch sometime in late 2017 when those who have pre-ordered will finally receive their orders. Tesla stock is up about 6% since the launch, and 60% from its February lows.
It’s probably too early to start calling this a new era in the life of 13-year old Tesla as a mass producer of electric vehicles, but these developments potentially point to a company on the cusp of something really big. Global Equities Research estimates that pre-orders could hit 300k by April 3 easily representing over $10B in potential future revenue for Tesla. For some perspective, Tesla finished 2015 with revenue of $5.29B. Elon Musk is quite conservative regarding the percentage of those orders that are likely to convert to actual sales and has pegged his estimates at 25%-50%. But there is really no good reason why Model 3 pre-orders should not achieve the historic conversion rate of 70%+ for Tesla’s previous models. After all, the vehicle has been able to generate a level of buzz that traditional automakers can only dream of. Tesla says that it will fully refund the $1,000 deposit fee for all cancellations so that may be helping with the high level of pre-orders. Many potential Model 3 customers are also probably aware that the Federal tax credit of $7,500 is limited to the first 200k units so there is a rush to order. The flip side is that customers who later learn that they won’t be receiving the government subsidy might decide to cancel their orders.
But even a pretty conservative calculation tells you that Tesla’s Model 3 is off to a very good start. Let’s assume that Model 3 pre-orders top 300k. Let’s now assume that 70% of the first 200k pre-orders convert to actual sales but only 50% of the final 100k are sold, or 190k units in total. That’s way higher than the 115k total plug-in vehicles sold in the U.S. in 2015. Base-trim Model 3 will sell for $35k with fully loaded trim levels exceeding $55k. Musk puts the ASP of Model 3 at 42k in one of his latest tweets. Using these figures, Tesla could be looking at Model 3 revenue of ~$5B for the first batch of orders. Model 3 could easily double Tesla’s current revenue in as little as two years after its launch.
Elon Musk has repeatedly said that the company’s Nevada Giga factory can produce as many as 500k units per year. It’s not very likely that the factory will be able to process that many in its first two years or so of operation, so it probably won’t be until around 2019 when it will achieve that kind of capacity. Tesla bears have long argued that the company is likely to become production-constrained soon, and this time around there is a real risk that Tesla might be faced with a bigger demand for its vehicles than it’s able to handle. But that’s an interesting kind of quagmire to find yourself in, as many automakers will tell you.
In the short-term, there is a slight but real risk that anticipation of delivery of Model 3 might depress sales of Model S and Model X over the coming quarters. Tesla indicated during its latest earnings call that it’s confident that it will achieve 60%-80% sales growth in 2016, way higher than the 40%+ growth it recorded in 2015. Sales for the company were up about 48% Y/Y during the first two months of the year. EV sales are typically slowest during the first two months of the year before gradually ramping up during the summer months. So we can say those early 2016 figures are tracking within Tesla’s estimates.
You can expect Tesla Motors Inc. stock to hit fresh highs when Model 3 orders turn to actual sales.