One of the most famous movie lines of all time comes from the movie Jaws: "You're gonna need a bigger boat." Today, the line is used in all sorts of applications, and it is very appropriate for Tesla Motors (NASDAQ:TSLA). On Thursday afternoon, a company executive detailed how the Model 3 is approaching 400,000 reservations, a number many did not see coming. With another 18 months roughly until the vehicle is officially released to the public, is it out of the question that Tesla could hit one million reservations?
(Source: Google Images, here)
It was just a week ago that Tesla CEO Elon Musk stated that reservations were over 325,000. Depending on how you define "approaching," this means that another 50,000-75,000 reservations were placed in the last week. Not only is this helping to pad the company's balance sheet with some much needed cash (along with no interest costs!), but it is showing that the public is increasingly eager to get its hands on the company's upcoming vehicle.
If Tesla can get almost 400,000 reservations in about two weeks, what can it get in the roughly 20-month lead time up to the first delivery? Unless the company has some major issue before then that causes customers to start canceling, half a million just seems like a matter of time, likely before the end of June at this rate. Even if the pace naturally slows down, would it be out of the question to maybe see 750,000 by the end of this year? That would certainly help the company get toward one million, especially as more details come and we get closer to launch. The expansion of Tesla into more and more countries around the globe should only make this process even easier, since the much cheaper Model 3 is aimed at a much larger target audience than the current Model S and Model X.
This many reservations will provide a problem for Tesla, although many will argue that this is likely a good one to have. With Tesla not even scheduled to deliver 100,000 vehicles this year, production will need to soar in order to get this backlog down in a meaningful time period. The company doesn't want a situation where if they get a million reservations, that millionth person doesn't see their Model 3 until 2025, for instance. The longer consumers have to wait, the more competition could possibly enter the space, increasing the number of cancellations. One million reservations sounds very nice, but if you don't covert those to sales, does it really matter?
In addition to Tesla getting $1,000 for each reservation, the Model 3 hype has sent the stock back to over $250 by Thursday's close, a sharp rally from lows seen earlier this year. With the company's market cap over $33 billion, along with a few hundred million in cash on the balance sheet, this would seem like a good time to raise capital if the company were to need so. When Tesla's market cap was under $19 billion early in 2016, a billion or two would have been fairly dilutive. Now, there wouldn't be as much of an impact.
So I pose this question to Tesla longs: would you be OK with the company raising a couple of billion dollars here if it meant the Model 3 could come even a few months earlier or if long-term production would ramp up? I would think the answer is yes, because this is the vehicle that the company's future is tied to. While it may mean extra dilution or interest expenses in the short term, Tesla needs to do everything it possibly can to get as many Model 3 sales as possible. Hopefully, management has learned from its Model X mistakes, allowing this production ramp to be a lot smoother and faster than what we are seeing right now.