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Demand Appears Strong for Tesla's Vehicles

2020 could be another year of big growth for the electric-car maker.

With Tesla's (NASDAQ:TSLA) 2019 deliveries up 50% year over year, following a year in which deliveries grew 138%, some investors may be concerned that the automaker could be hitting a peak when it comes to demand for its vehicles. After all, Tesla is already delivering more than 300,000 Model 3 units annually -- and Model S and X deliveries are down year over year. Could Model 3 deliveries soon peak and Model S and X deliveries continue falling sharply on a year over year basis?

While these surface-level observations can help inform an investor's view of the company, they miss some other important trends in Tesla's business, which paint a more optimistic picture of the demand story for the electric-car maker.

Here are four reasons demand for Tesla's vehicles is probably strong going into 2020.

Demand Appears Strong for Tesla's Vehicles
Model 3. Image source: Tesla.

Orders have been tracking higher

As of Tesla's most recent update on order trends, which was on Oct. 23 when the company reported third-quarter results, global orders for Tesla vehicles were on the rise. Indeed, Tesla CFO Zach Kirkhorn said in the company's third-quarter earnings call that the company's global order rate was continuing to increase, as it was in prior quarters. "Despite increases to production levels, our order backlog has been growing, and quarter to date orders are significantly higher than at this point in last quarter," he explained.

Tesla's growing orders throughout 2019 were impressive since the federal credit for U.S.-based buyers of Tesla vehicles was cut from $7,500 to $3,750 on Jan. 1, 2019, and from $3,750 to $1,875 on July 1, 2019.

Growing orders, even the tax credit dwindled, bodes well for how orders can hold up in 2020 now that the U.S. credit for buyers of Tesla vehicles has been totally eliminated.

Deliveries are exceeding production

Adding credibility to Tesla's claims in October that orders were on the rise, the company's deliveries significantly exceeded production in Q4, despite an increase in quarterly production. Tesla delivered about 112,000 vehicles, yet it produced only 104,891. And this followed Q3 -- another quarter in which deliveries outpaced production, albeit more modestly. In Q3, Tesla delivered 97,186 vehicles and produced 96,155.

Model S and X deliveries are rising sequentially again

Also notable is that while Tesla's Model S and X deliveries in Q4 were down 30% year over year, they were up sequentially.

After combined quarterly Model S and X deliveries bottomed out in Q1 at 12,091, they rose to 17,700, 17,500, and 19,450 in Q2, Q3, and Q4, respectively.

Kirkhorn confirmed in Tesla's third-quarter earnings call that demand was climbing again for these vehicles. "[W]e are increasing production on our S and X lines for this quarter in response to increasing demand," he said.

Model 3 deliveries are soaring

Finally, there's the most obvious -- but probably the most important -- reason of all to be optimistic about demand for Tesla's vehicles. The Model 3 is proving to be a blockbuster hit, which seems to be soliciting more demand the more Model 3 vehicles there are on the road. In other words, word-of-mouth marketing seems to continue to be a key driver of Tesla's sales.

The automaker's trailing-12-month Model 3 deliveries are up 106% year over year. Even in Q4 alone, deliveries of the vehicle were up 46% year over year and 16% sequentially.

With sales growth like this, it's unlikely that Tesla is closing in on peak Model 3 demand yet.

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