Tesla’s New Vehicle Inventory Skyrockets – Seeking Alpha

 In Business
Tesla, Inc (TSLA) does not make it easy to follow the all of the moving parts in this company. Investors and analysts have not been asking enough probing questions and pushing for answers. In fairness, to our analyst community there have been questions posed to Elon Musk that he has just flat refused to answer “…we don’t report that number…” (Model 3 reservations for example). At times Musk has considered requested information “not material,” or infamously on one occasion described the numbers as ” mouse nuts.”

The fact is, contrary to what Tesla would like us to believe and until now has failed to disclose, this company has a huge and growing number of unsold new vehicles. Tesla has not been “production constrained” for months.

The story of battery shortfalls causing productions delays (a headline in Tesla’s Q2 statement first issued on July 3rd) made little sense to me. I have been putting the puzzle pieces together for a while now. I disclosed some of the pieces in my recently published articles about growing inventories of unsold new cars clogging delivery center parking lots and new cars once again being discounted. You can read those inventory-related stories here and here if you missed them earlier.

This article addresses an even bigger inventory concern.

My number crunching shows that by now Tesla should have been dialing back production as sales and orders of new units have tapered off and inventories of new units have climbed. Ford(F), General Motors (GM) (see articles here, and here) and other manufacturers do this routinely to maintain a proper balance between production and inventory. Remember that up until now, Tesla has always claimed to be demand driven, meaning cars were selling as fast as they could build them due to order backlogs. I believe that was true through the end of Q3 2016. But I can now prove that has not been the case for at least six months, and as you will read, has been confirmed by at least one Wall Street analyst.

Based on my numbers, it is now documented that Tesla’s inventory of completed, but unsold units increased by more than 3,900 units in the three quarters between Q3 2016 and Q1 2017. In Q2 2017 alone, that number more than doubled again to over 8,800 units. At an average retail price of about $100,000 per unit, this translates to over $880 million in accumulated new inventory. The press release on Friday, July 7th issued by Tesla claiming in-transit units of 3,500 at the end of Q2 was the final piece I needed to complete this four quarter puzzle.

Nearly 9,000 units of excess production have piled up in just 12 months. This is not the total unsold inventory, but just the increased amount. Every sales center had test drive and floor units at the beginning of Q3 2016. Whether being used as test drive units, service loaners or just sitting on a lot somewhere, this amount of inventory is ridiculous. It represents more than 11% of the total units sold in all of 2016. A portion of these units are certainly models no longer being produced. Examples can be found today on a search of the new inventory on EV-CPO.com. Power enhancements to Model S units were discovered by a writer for InsideEvs (see article here) just days ago. Theorized as an effort to further separate the Model S from the Model 3, these “enhancements” also mean similar inventory units already sitting out there have just become less desirable and harder to sell.

The numbers in my chart (shown below) are based on actual figures released by Tesla in their quarterly announcements of units produced, delivered, and in-transit units that are “expected to be reflected in the following quarter’s deliveries.” I have listed them here in date order for easy reference ( Q2, Q3, Q4 2016, Q1 and Q2 2017) You will notice the last quarter, Q2 17 first released on July 3rd has been “updated” with the following added on July 7th.

Update: In response to questions we have received about the number of customer vehicles in transit at the end of Q2, we are updating our Q2 delivery release to provide this information. This information will continue to be included in all future quarters.

In addition to Q2 deliveries, about 3,500 vehicles were in transit to customers at the end of the quarter. These will be counted as deliveries in Q3 2017.” (emphasis from the author)

It appears that I was not the only person looking for this vital piece of information.

Forming the picture

Starting with quarterly “Total Deliveries,” I subtract the “Prior Qtr In-Transit Deliveries” that should have been delivered in the current quarter. (There is no independent source outside of Tesla’s own database to determine if all in-transit units were actually delivered, so I have given 100% credit that they were indeed delivered as expected). That gives us “Current Production Deliveries.” Subtract this number and the “Units In-Transit at Qtr End” (that will be delivered in the upcoming quarter) from the “Units Produced” and you have the “Quarterly Surplus Inventory.” Add that number to the previous quarter’s “Cumulative Surplus Inventory” number and you have the latest Cumulative Surplus Inventory figure. (Ex. for Q2 2017: 22,000-4,650 =17,350. 25,708-17,350-3,500=4,858. 4,858+3,964=8,822.) This is not rocket science, just simple addition and subtraction.

The chart below gives the numbers better clarity.

This makes it easy to see that new unit inventory grew by over 100% from Q4 2016 to Q1 2017. It more than doubled again from Q1 to Q2 2017.

Next question: Why has this been allowed to happen? My best guess is “narrative.” Tesla needs a continuing growth story. This anticipated growth, hyped in every new announcement from Tesla, has caused this stock to balloon in price beyond any normal financial parameters. To most professional analysts, it has been hard to justify this share price even after the 18% correction from last week. Ben Kallo of Baird is one of the few exceptions. His current share price prediction is north of $500.

The growing inventory does not go unnoticed.

The inventory issue was raised for the first time in the Q1 Conference Call held on May 3, 2017. Tesla management tried to explain away the issue. Here is that exchange. (All emphasis has been added by the author.)

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