Tesla Model 3 Reservation Concerns: Much Ado About Nothing

| About: Tesla Motors (TSLA)


The prospectus for Tesla's recent capital raise indicated that current Model 3 reservation total about 373k.

This comes a couple weeks after Musk tweeted that reservations were approaching in on 400k.

Some commentators are worried that this drop off in new reservations is a negative event. I disagree.

Tesla (NASDAQ:TSLA) bears have recently been presented with a brand new reason to short the stock: Total Model 3 reservations are not quite as high as many expected! As such, the company's plan to ramp up the pace of production is simply an excuse to raise money they needed anyways.

While this narrative may make Montana Skeptic and the bears feel better about their short position, I believe they are making much ado about nothing. There are many legitimate reasons for considering a Tesla short: continued operating losses, the fact that the company is worth almost as much as General Motors (NYSE:GM), yet makes less than 1% as many cars, a CEO prone to over-promising. A slowdown in the number of Model 3 reservations is not one of them.

As part of their recent $1.4B offering of new shares to fund their Model 3 expansion, Telsa updated the market with their current amount of reservations: 373k. This number, the net result after 8k cancellations and 4.2k removed duplicate orders by speculators, is lower than most Telsa observers expected, given than Musk had stated that they were getting close to 400k in late April.

This is a non-event for a couple reasons. First, there were always going to be some people that changed their mind on the initial reservation. A 2-3% rate so far does not seem out of the ordinary, especially when you consider the fact that people towards the end of the queue will not see their car until the end of 2018 (or end 2019-2020 if Tesla is late as usual).

Second, there is currently no good reason for people to make additional reservations at this time. If we assume that Tesla executes on their plan to deliver 500k cars in 2018, someone making a reservation today is only going to be on pace to receive a 25% tax credit, if any at all. If Tesla is slower rolling out than they hope, then perhaps only the first 250-300k reservations will be in line to receive any amount of credit.

Given the lack of urgency to reserve now, I don't see the reservation losses as a negative. The fact that the company got close to 400k in the first place is clear proof that the demand is there. For every reservation, I'm sure there are another five people like myself that would have loved to make one but couldn't justify the deposit. Once the car is available and the value/price continues to improve, non-reservation holders are going to buy in droves.


If Tesla's other issues haven't scared you away from being invested in the stock, then by no means should the reservation numbers be of any concern. I've never been a Tesla shareholder because I could never get my head wrapped around the valuation, and execution risk is currently extremely high. That said, I wouldn't be short either, given that the company continues to deliver on their long term goal of making EVs affordable.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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