The Truth About Tesla, Inc.'s Model 3 Reservations

After Tesla's (NASDAQ: TSLA) second-quarter earnings call, there has been some confusion about how the electric-car maker's reservations for its recently launched Model 3 are faring. Some major media outlets have misinterpreted CEO Elon Musk's comments about gross reservations versus net reservations to mean that total reservations have declined by 63,000. But this isn't the case -- far from it actually.

On the contrary, Tesla's net reservations for the Model 3 vehicle have been steadily rising. Furthermore, Model 3 reservations accelerated in recent weeks and are climbing after the vehicle's final unveiling and first deliveries on July 28.

The facts

To be fair, it's easy to see how there's some confusion about Model 3 reservations. In a briefing with the press about the Model 3 on July 28, Musk said reservations had exceeded 500,000. But the CEO later backtracked and explained that he was referring to gross Model 3 reservations.

Nowhere, however, did Tesla say that Model 3 reservations have dropped. Here's what Musk actually said, courtesy of a transcript of the earnings call from S&P Global Market Intelligence.

The total reservations Tesla had, net of cancellations, therefore, never rose to 518,000. This figure instead represented the total gross Model 3 reservations -- ever. Indeed, Musk went further and clarified that the 63,000 cancellations he cited "occurred over the course of more than a year."

To say that Model 3 reservations dropped recently is stating the exact opposite of the truth. In reality, net reservations since the final Model 3 unveiling have been increasing at a notable rate of over 1,800 per day at the time of Tesla's second-quarter earnings release, which was on Aug. 2 -- five days after the final unveiling.

And if this isn't enough to show how optimistic customers are continuing to respond to the Model 3, here's one final fact to refute any misinformed notion that reservations have dropped: "With no advertising, paid endorsements or guerrilla marketing campaigns, Model 3 net reservations have still steadily climbed every month, and have even accelerated further in recent weeks," Tesla said in its Aug. 2 shareholder letter.

Does it matter?

Any confusion about Model 3 reservations is arguably immaterial to a thesis about Tesla stock. Sure, to imply that its reservation count has dropped by 63,000 is blatantly wrong. But as I've said before, as soon as Model 3 reservations soared past 373,000 within 45 days of when the important vehicle was first teased, their trajectory became irrelevant -- at least for now. This initial surge in reservations was enough to highlight the hit Tesla had on its hands.

Not until Tesla begins to put some meaningful effort into generating demand for the Model 3 should investors begin to keep an eye on demand for the car. Today, Tesla's Model 3 page on its website strategically pitches the Model S in an effort to anti-sell the Model 3 -- a move that makes perfect sense; why would Tesla try to increase demand for a vehicle when new customers have to wait as long as 18 months to take delivery as it ramps up production?

Still, as far as the reservation count is concerned, even after Tesla starts putting some effort into creating more demand for Model 3, investors should hope that production begins to pick up at a rapid enough rate that Tesla can begin making a dent in its reservation count, ultimately reducing total net reservations. As production increases, order rates for Model 3 -- not reservations -- will become the new metric to watch.

While we wait for an update on Model 3 demand after Tesla begins pulling more levers to drive it higher, here's a last mind-boggling tidbit for investors to mull over: Of 518,000 gross reservations for the Model 3, only 12% have been canceled over the course of more than a year. Meanwhile, total net reservations continue to climb -- despite the fact that Tesla says new customers will have to wait 12 to 18 months to take delivery.

10 stocks we like better than TeslaWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Tesla wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.