Should Tesla’s Inventory Pileup Worry Investors?

Tesla (NASDAQ:TSLA) stock has declined by close to 29% this year, considerably underperforming the broader S&P 500, which gained 14% over the same period.  This downturn in Tesla’s stock contrasts sharply with the performance of legacy auto major General Motors (NYSE:GM), whose stock has gained more than 35% this year. The broader EV market has slowed down, and Tesla is experiencing a noticeable cool-off in delivery volumes. In Q1 2024, Tesla delivered 386,810 vehicles, marking an 8.5% decline from the same period last year. With its aggressive expansion in production capacity, Tesla appears to be contending with a growing stockpile of unsold vehicles. Production for the last quarter stood at 433,000 vehicles, indicating that an additional 47,000 cars were likely added to inventory. Reports and satellite images reveal unsold Teslas accumulating in parking lots across Texas, Australia, and Germany. Furthermore, Tesla’s global vehicle inventory, measured in days of supply, has increased from 15 days in Q1 2023 to 28 days in Q1 2024. Delivery times for Tesla have also decreased from up to six months in 2022 to just a few weeks for customized models.

Now the higher unsold inventory is a problem, as it could indicate that the company is going into a down cycle, with cash being tied into stock. The inventory buildup meant that Tesla’s free cash flow was negative $2.5 billion over Q1 2024.  That said, Tesla expects things to normalize in the current quarter.  In response to the growing inventory, Tesla has implemented price cuts on its stock vehicles while charging more for customized models. For instance, the long-range and performance versions of the Model Y have recently seen discounts of $5,000 or more. Moreover, Tesla’s manufacturing process is also highly automated, and this could help the company better adjust its production as needed going forward. Tesla is likely to bank on increased sales of autonomous driving software and the deployment of artificial intelligence tools to boost its earnings growth in the long term.

Now TSLA stock has faced a notable decline of 25% from levels of $235 in early January 2021 to around $175 now, vs. an increase of about 45% 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, Arista Networks (NYSE:ANET), another company that also benefits from the big AI trend, has seen its stock surge by over 300% since January 2021. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI space. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. Now, will Tesla stock see a recovery going forward?

We continue to believe that Tesla will remain a big 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. 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.

Several factors are contributing to the dampened demand for Tesla vehicles. High interest rates have made it more expensive for customers to finance vehicle purchases. Additionally, the lack of extensive charging networks in many countries and falling resale values for EVs are likely discouraging potential buyers. The market of early EV adopters is also likely saturating, leading to lower demand. The impact of the aggressive price cuts Tesla implemented over the past year is also diminishing, while competition is getting more intense, especially in markets like China, where local manufacturers offer a range of compelling EVs. Tesla’s pricing power appears to be waning, which is impacting its average selling prices. In Q1 2024, the average price of Tesla vehicles dropped to under $45,000, down from about $47,000 in the same quarter last year. We value Tesla stock at $177 per share, roughly in line with the current market price. 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 6/13/2024
[2] Cumulative total returns since the end of 2016

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