Investor's Corner
Concerns about Tesla’s (TSLA) alleged ‘demand problem’ are likely overblown
The past few months have not been kind to Tesla stock (NASDAQ:TSLA). Following the company’s lower-than-expected production and delivery figures from the first quarter, the negative narrative surrounding Tesla has gone on overdrive. At the forefront of this is a thesis that the electric car maker’s critics have been pushing: Tesla has a demand problem.
This particular point has spread like wildfire, particularly over the past few weeks. Analysts that recently downgraded TSLA stock would reference weak demand for the Model 3, and bears would echo the same assumption during segments in mainstream media. While this narrative is compelling in the way that it appears to be a foreshadowing of Tesla’s eventual demise, the demand problem thesis is at best inaccurate and at worst flat-out wrong, simply because one can’t base a thesis in one data point.
TSLA investor @Incentives101, an economist with a background in macro research, notes that there is a considerable misconception surrounding Tesla’s Q1 results and how it relates to the demand for the company’s electric cars. In a conversation with Teslarati, the investor explained that while it is easy to make assumptions based on Tesla’s Q1 2019 figures, there is simply not enough data to accurately and responsibly forecast Model 3 (and in extension, Model S and X) demand. Tesla’s Q1 2019 data is nevertheless useful, as it reveals a series of factors that could shed light on what is happening to the electric car maker.
Shocks, Backlogs, and Demand
The economist notes that demand shocks could be transitory or permanent. Taxes, for example, normally have a permanent effect and natural disasters have a transitory one. But these shocks have different effects over time depending on whether a shock is sudden or expected. Understanding how demand normally reacts to these shocks is very important, as it provides clues at what could be expected to make informed assumptions about Q1. When a shock such as a federal tax credit reduction comes, for example, its effect happens in three stages — given that consumers knew it was coming. Before the shock hits, demand generally increases (pulling demand), followed by a period where demand decreases by more than what could be considered a new equilibrium. Following these is another period where demand increases to reach a new equilibrium. Q1 most likely was the worst part of the second stage.
The backlog of Model 3 reservations was primarily used as a point against Tesla by critics, with an assumption suggesting that there will be no demand for the vehicle after the company clears out its initial batch of reservations. The economist argued that while Tesla’s backlog is widely believed to be a factor impacting demand, such a factor would likely not be relevant in the bigger picture. “Given the characteristics of auto demand (it recycles constantly, consumers preferences are well understood, and trends are clear) a ‘backlog’ has the same effect as a natural disaster if you really want to compare it to something. If the backlog happens at the same time as a tax shock or other shocks, it just exacerbates the move. The duration of the shock could be discussed, but in the end, the effect of the backlog is just irrelevant,” the investor said.
Tesla faced a number of shocks in the US auto market in recent months, and these could be translated into inaccurate assumptions. Among these are negative shocks such as the reduced federal tax credit, the “end” of the Model 3 reservation backlog, seasonality, and supply; as well as positive shocks like price reductions on the company’s vehicle lineup.
“There are some main conclusions that one can infer from the data: 1) There isn’t information available to know what the initial equilibrium was. The exponential shape of the curve gives no reference whatsoever to know this. Comparing Model S/X vs. Model 3, is easy to see that S/X had a stable path which would make it easier to measure the impact of these type of shocks; 2) Over time, the shock will be (almost) totally explained by the reduction in supply; 3) Shocks were expected, and price adjustments should more than cancel any negative permanent shock that taxes would have; and 4) Tesla had really bad luck with all these things happening at the same time,” the economist remarked.
Consumer Preferences
Based on these data, one can infer that the primary constraint that Tesla is facing is not demand, but supply. Demand for the company’s vehicles is not exclusive to the United States auto market. It is global, and in this sense, there is simply no indication that global supply for Tesla’s electric cars is already meeting global demand. The investor noted that the effect of the “backlog” argument in global markets would likely be marginal and transitory, and just as demand is not static, supply and prices have not been either.
Ultimately, the most significant factor that would affect the demand for Tesla’s vehicles is consumer preferences. In recent years, consumer preferences are changing in favor of smart devices, and this cascades into the auto industry. Tesla’s electric cars, which are arguably the most tech-focused consumer vehicles on the road today, are a perfect fit for this changing landscape.
According to the economist, “Consumer preferences and regulation actually affect demand. Prices technically don’t affect demand — just the quantity demanded — and the trend shows that it will have a multiplier effect. It’s always important to ask the correct questions, and the question today is not what are they doing to ‘fix’ a transitory shock? Or where’s demand? The question is, how will you increase supply?”
Alleged ‘Cannibalization’ of the Model S and X by the Model 3
In terms of the alleged cannibalization of Model S and X sales by the Model 3, the investor notes that there is no reason, at least at present, to believe that cannibalization is actually happening. Tesla Model 3 sales increased while Model S and X remained in their path, and as sales of the flagship sedan and SUV decreased, Model 3 sales in the US decreased as well.
“Even if you disaggregate data to try to find signs of cannibalization, there’s still no proof. There’s only one market — Norway — that is big enough, that has reliable data and didn’t face any distortions (tax or subsidy), that could give us any insight about cannibalization. Without further information, it would seem that there was significant cannibalization. The only problem is that Tesla distorted the market by eliminating the most popular Model S and X variant (75kWh), which was, on average 70%+ of sales. It is simply impossible to know which effect (the Model 3’s introduction or the 75kWh variant’s elimination) had the biggest impact, or even measure them in any way. And even then, one market may not be enough to prove it,” the investor stated.
Ultimately, the continuing phase-out period of the federal tax credit in the US would likely affect Model S and X sales in the country. But similar to the Model 3, these effects will likely be transitory and not permanent, especially given that prices have changed accordingly, given that the vehicles have better value per dollar. As with the Model 3, the sharp decrease in Model S and X sales in Q1 2019 could be explained by supply changes in its totality. Thus, demand should return to its previous path after a short period of time.
Disclosure: I have no ownership in shares of TSLA and have no plans to initiate any positions within 72 hours.
Investor's Corner
Tesla is ‘better-positioned’ as a company and as a stock as tariff situation escalates
Tesla is “better-positioned” as a company and as a stock as the tariff situation between the United States, Mexico, and Canada continues to escalate as President Donald Trump announced sanctions against those countries.
Analysts at Piper Sandler are unconcerned regarding Tesla’s position as a high-level stock holding as the tariff drama continues to unfold. This is mostly due to its reputation as a vehicle manufacturer in the domestic market, especially as it holds a distinct advantage of having some of the most American-made vehicles in the country.
Analysts at the firm, led by Alexander Potter, said Tesla is “one of the most defensive stocks” in the automotive sector as the tariff situation continues.
The defensive play comes from the nature of the stock, which should not be too impacted from a U.S. standpoint because of its focus on building vehicles and sourcing parts from manufacturers and companies based in the United States. Tesla has held the distinct title of having several of the most American-made cars, based on annual studies from Cars.com.
Its most recent study, released in June 2024, showed that the Model Y, Model S, and Model X are three of the top ten vehicles with the most U.S.-based manufacturing.
Tesla captures three spots in Cars.com’s American-Made Index, only U.S. manufacturer in list
The year prior, Tesla swept the top four spots of the study.
Piper Sandler analysts highlighted this point in a new note on Monday morning amidst increasing tension between the U.S. and Canada, as Mexico has already started to work with the Trump Administration on a solution:
“Tesla assembles five vehicles in the U.S., and all five rank among the most American-made cars.”
However, with that being said, there is certainly the potential for things to get tougher. The analysts believe that Tesla, while potentially impacted, will be in a better position than most companies because of their domestic position:
“If nothing changes in the next few days, tariffs will almost certainly deal a crippling blow to automotive supply chains in North America. [There is a possibility that] Trump capitulates in some way (perhaps he’ll delay implementation, in an effort to save face).”
There is no evidence that Tesla will be completely bulletproof when it comes to these potential impacts. However, it is definitely better insulated than other companies.
Need accessories for your Tesla? Check out the Teslarati Marketplace:
- https://shop.teslarati.com/collections/tesla-cybertruck-accessories
- https://shop.teslarati.com/collections/tesla-model-y-accessories
- https://shop.teslarati.com/collections/tesla-model-3-accessories
Please email me with questions and comments at joey@teslarati.com. I’d love to chat! You can also reach me on Twitter @KlenderJoey, or if you have news tips, you can email us at tips@teslarati.com.
Tesla (NASDAQ: TSLA) received a price target boost from analysts at Truist Securities, but it came with some criticisms based on a lack of information on several things that investors were excited to hear about regarding future vehicles and AI achievements.
Last night, Tesla reported its earnings from the fourth quarter of 2024, and while it had a very tempered financial showing, missing most of the Wall Street targets that were set for it, the stock was up after hours and on Thursday due to the details the company released regarding its plans for 2025.
CEO Elon Musk stunned listeners last night by revealing plans to launch unsupervised Full Self-Driving as a service in Austin in June 2025. It will be the first time Tesla will offer driverless FSD rides in public, something it has been working with the City of Austin on since December.
Tesla to launch unsupervised Full Self-Driving as a service in Austin in June
It also reiterated plans for affordable models to be launched this year, potentially catalyzing annual growth in deliveries, something it said it expects to resume in 2025.
Tesla was flat on deliveries in 2024 compared to 2023.
The positives during the call were enough for Truist Securities analyst William Stein to raise the company’s price target to $373 from $351. However, Stein’s note to investors showed there was something to be desired despite all the good that was revealed during the call:
Stein said there was “not enough ground-truth” during the call and too much of a focus on “cheerleading” the company’s potential releases this year:
“Too much cheerleading; not enough ground-truth. In Q4, TSLA’s ASP weakness drive revenue, GPM, OPM, & EPS below consensus.”
As previously mentioned, Tesla did report weak financials that missed consensus estimates. What saved the call and perhaps the stock from plummeting on these missed metrics was the other details that Musk revealed, especially the FSD launch in Austin in June.
There were also plenty of things related to the affordable models and other vehicles, like the fact that Tesla plans to include things like Steer by Wire, Adaptive Air Suspension, and Rear Wheel Steering, that helped offset negatives.
Stein saw this as a distraction from what should have been reported:
“While CEO Elon Musk played the role of cheerleader, calling for TSLA’s path to massive market cap by leading in autonomy, management was remarkably short on two critical details: (1) info about new vehicles in 2025 and (2) milestones for AI acheivements, especially FSD. We continue to ask ourselves ‘where’s the beef?’ CY26 EPS to $3.99 (from $4.87). DCF-derived PT to $373 (from $351).”
Tesla did detail some AI milestones, like its record-breaking miles per accident on Autopilot, which was a Q4-best of 5.94 million miles. The Shareholder Deck also outlined major upgrades to AI:
“In Q4, we completed the deployment of Cortex, a ~50k H100 training cluster at Gigafactory Texas. Cortex helped enable V13 of FSD (Supervised)1, which boasts major improvements in safety and comfort thanks to 4.2x increase in data, higher resolution video inputs, 2x reduction in photon-to-control latency and redesigned controller, among other enhancements.”
Tesla shares are up 2.11 percent on Thursday as of 12:05 p.m. on the East Coast.
Need accessories for your Tesla? Check out the Teslarati Marketplace:
- https://shop.teslarati.com/collections/tesla-cybertruck-accessories
- https://shop.teslarati.com/collections/tesla-model-y-accessories
- https://shop.teslarati.com/collections/tesla-model-3-accessories
Please email me with questions and comments at joey@teslarati.com. I’d love to chat! You can also reach me on Twitter @KlenderJoey, or if you have news tips, you can email us at tips@teslarati.com.
Tesla has released its Q4 2024 vehicle safety report. Similar to data from previous quarters, vehicles that were operating with Autopilot technology proved notably safer.
The Q4 2024 report:
- As per Tesla, it recorded one crash for every 5.94 million miles driven in which drivers were using Autopilot technology.
- The company also recorded one crash for every 1.08 million miles driven for drivers who were not using Autopilot technology.
- For comparison, the most recent data available from the NHTSA and FHWA (from 2023) showed that there was one automobile crash every 702,000 miles in the United States.
Previous safety reports:
- In Q3 2024, Tesla recorded one crash for every 7.08 million miles driven in which drivers were using Autopilot technology and one crash for every 1.29 million miles driven by drivers not using Autopilot technology.
- In Q2 2024, Tesla recorded one crash for every 6.88 million miles driven in which drivers were using Autopilot technology, and one crash for every 1.45 million miles driven for drivers not using Autopilot technology.
- In Q1 2024, Tesla recorded one crash for every 7.63 million miles driven in which drivers were using Autopilot technology, and one crash for every 955,000 million miles driven for drivers not using Autopilot technology.
Year-over-Year Comparison:
- In Q4 2023, Tesla recorded one crash for every 5.39 million miles driven in which drivers were using Autopilot technology and one crash for every 1.00 million miles driven for drivers not using Autopilot technology.
Key background:
- Tesla began voluntarily releasing quarterly safety reports in October 2018 to provide critical safety information about our vehicles to the public.
- On July 2019, Tesla started voluntarily releasing annual updated data about vehicle fires as well.
- It should be noted that accident rates among all vehicles on the road can vary from quarter to quarter and can be affected by seasonality, such as reduced daylight and inclement weather conditions.
Don’t hesitate to contact us with news tips. Just send a message to simon@teslarati.com to give us a heads up.
Armored Tesla Cybertruck “War Machine” debuts at Defense Expo 2025
Tesla Megapacks chosen for 548 MWh energy storage project in Japan
