With Deliveries Falling And Inventory Piling Up, What’s Next For Tesla Stock?

Tesla (NASDAQ:TSLA) quarterly deliveries declined by 8.5% from a year ago to 386,810 vehicles for Q1 2024 and fell well below Wall Street estimates. The number was also down 20.2% from the prior quarter. This marks the first time in roughly four years that Tesla has seen a decline in sales, the last time being when the first set of Covid-19 lockdowns in 2020 impacted production. Tesla stock has lost about 7% of its value over the last week and remains down by 33% year-to-date.

We see several factors dampening demand for Tesla vehicles. High interest rates are making it more expensive for customers to fund vehicle purchases. The effects of the aggressive price cuts Tesla has made over the past year are easing. Competition is also mounting particularly in markets like China, where there are a slew of compelling EVs produced by local manufacturers. Tesla’s lineup is also aging with its Model 3, Y, X, and S remaining largely the same visually since launch. This is in contrast with mainstream automakers, who typically overhaul vehicle models every six to seven years.

Tesla’s inventory also appears to be piling up. Production for the quarter stood at 433,371 vehicles during the period, about 12% ahead of deliveries and Tesla is taking steps to dilute it. While the company started charging $1,000 for customized orders of its Model Y earlier in March, it is offering big price cuts on vehicles it has in its inventory. The long-range and performance versions of the Model Y, for instance, are seeing discounts of $5,000 or more. This could put further pressure on Tesla’s margins. For example, for Q4 2023, the average price of a Tesla vehicle has declined to $44,500 as of Q4, down 16% year-over-year, while gross margins have declined 610 basis points year-over-year to 17.6%, while operating margins almost halved to 8.2%. We could see the numbers trend lower over Q1 when the company reports earnings later this month.

TSLA stock has faced a notable decline of 30% from levels of $235 in early January 2021 to around $165 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period.
However, the decrease in TSLA stock has been far from consistent. Returns for the stock were 50% in 2021, -65% in 2022, and 102% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TSLA underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Discretionary sector including AMZN, TM, and HD, and even for the megacap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TSLA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

We continue to believe that Tesla will remain a major beneficiary of the long-term transition to cleaner transportation and energy generation, given its well-oiled supply chain, superior battery and drive train tech, and its lead with software and self-driving technology. Tesla also says that it is likely to launch its robot taxi offering in early August. That said the company is likely to see its deliveries and earnings face pressure this year, falling well below the company’s multi-year target of 50% annual growth in revenues.  Although we are maintaining our $210 price estimate for Tesla, which is about 25% ahead of the current market price, we will be revisiting our price estimate post the company’s Q1 results. See our analysis on Tesla Valuation: Is TSLA Stock Expensive Or Cheap? for more details on Tesla’s valuation and how it compares with peers. For more information on Tesla’s business model and revenue trends, check out our dashboard on Tesla Revenue: How Does TSLA Make Money?

[1] Returns as of 4/7/2024
[2] Cumulative total returns since the end of 2016

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