Markets

Tesla Is Seeing Strong Demand for Its Vehicles

One big question going into Tesla's (NASDAQ: TSLA) second-quarter earnings report was how demand for the electric-car maker's vehicles is faring. Many investors were likely wondering whether or not the pandemic and a spike in unemployment had taken a toll on the company's order volume.

As it turns out, Tesla isn't the least bit concerned about demand for its vehicles. In fact, Tesla CEO Elon Musk says the company is seeing strong order volume throughout the pandemic. In addition, management provided guidance for sharp growth in total 2020 vehicle deliveries compared to 2019.

Tesla's Model S, X, 3, and Y

Image source: Tesla.

Robust demand

When asked during Tesla's second-quarter earnings call about the near-term demand environment for its vehicles during the pandemic, Musk said, "Demand is not a problem, definitely not."

The CEO reiterated this stance again in an interview on the Daily Drive Automotive News podcast last week, saying that the company "saw strong orders through the whole pandemic." He implied that the company's online presence that makes online orders easy was likely an advantage for Tesla. 

Fortunately, investors don't have to rely solely on management's report on demand to know that things are going well. The automotive company also shocked investors with second-quarter deliveries that were far higher than analysts were expecting. Total deliveries during the period were down just 5% year over year, despite Tesla's main factory in California being shut down for nearly half of the quarter.

Big expectations

Offering more support for management's optimistic view for demand, the automaker put an aggressive target on its deliveries for the full year. In its second-quarter shareholder letter, management said it is targeting half a million deliveries in 2020. Highlighting how rosy this outlook is, this target implies 36% year-over-year growth.

Even more, Musk indicated during Tesla's second-quarter shareholder letter that the limiting factor on not having a greater target than 500,000 vehicles in 2020 has more to do with supply than demand.

"It's really just a production issue. It's been pretty hard when you've got like a global supply chain, and it's kind of whatever the most effective part of supply chain is that sets your rate," Musk said. In fact, "demand exceeds supply right now," he added.

Tesla's positive demand story is good news for investors, as the company relies heavily on word-of-mouth marketing for its sales growth. If demand were to ever show signs of weakness, the company may have to begin spending money on advertising, reducing its profitability. Further, the stock's current valuation already prices in significant growth in deliveries for years to come. Growth in order volume over time, therefore, is essential to any bull thesis for Tesla stock.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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