Tesla: The Inventory Jump In Q1 Isn’t Good, But May Not Be All Bad (NASDAQ:TSLA)

Tesla, Inc. (NASDAQ:TSLA) reported its Q1 2024 quarterly earnings on April 23, 2024, that were highly anticipated by both bulls and bears on the stock. Although the company reported weak earnings on both the top and bottom lines, investors were buoyed by comments from management on the ensuing earnings call, relief that results were not worse or both, sending the stock up over 12% on Wednesday. This move may also be driven by some technical and option buying, as the stock had been relentlessly sold over most of 2024.

I have long been watching the levels of inventory that Tesla has held, as it is one of the largest line items that consume cash. Tesla has been posting good results over the last several years since I last covered the company, but its elevated valuation and stock volatility has led me to largely stay on the sidelines. In a good blog post from Motorhead, he illustrates some cases in the past where inventory has played a role in the financial issues at several legacy carmakers in the late ’90s and early 2000s, notably GM, Chrysler and Nissan. This article takes a look at how Tesla’s inventory has developed over the last year.

Tesla’s 2023/24 Inventory Growth

Over the last five quarters, Tesla production has outpaced deliveries in four of the five quarters (Q3 2023 saw a small drop), leading to an increase in finished goods on hand. Utilizing the same methodology used by Tesla (per the Automotive news Definition of global Vehicle Inventory Days), we can see the continuity of its finished goods:

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Source: Tesla Q1 Press Release.

We can see that Q1 2024 was quite a tough period for the company. Tesla had almost 50% more vehicles on hand at quarter end than just 3 months before, even while they curtailed production by 12% compared to Q4. Their recent layoff announcement would seem to indicate that they are seeing continued weakness in demand, although they are also making efforts to lean out their cost structure.

The Cost of Tesla’s Inventory

Now let us look at inventory in dollars, based on Tesla’s reported numbers:

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Source: Tesla SEC Quarterly/Annual Reporting

As expected, most of the inventory increase is driven by the finished goods and work-in-progress (WIP) categories. Given the sheer increase in cars on hand, I was expecting to see a much higher amount. Looking at the trend in cost per car over the last 5 months, it would appear that the company is making some strides in improving the cost structure of its cars, going from $54,283 in Q1 2023 to $46,721 in Q1 2024, even against a backdrop of reduced production in Q1 and several facilities that are not running near capacity. It is possible this is simply a product mix change with a shift to more Model 3s (Tesla does not break this sales level out by model), but it would appear they are making at least some headway on reducing the cost structure.

Now, unfortunately for Tesla, these cost savings are only maintaining their margins as they have had a series of price cuts in 2024 to move their inventory.

Valuation

There was a lot of talk on the Tesla Q1 conference call about its various growth initiatives, from Optimus to ride-hailing to robotaxis to future undisclosed models, but there wasn’t anything addressing the news reports that its low-cost Model 2 had been cancelled. Combined with the slowing sales represented by the build-up of inventory I noted above and potential issues at being able to produce cars at an economic level in the near future, it is very difficult to argue that Tesla deserves a growth multiple anymore.

Looking at consensus earnings estimates, Tesla is projected to earn on average $2.43 in 2024, rising to $3.24 in 2025. It is very hard at this point in the economic cycle with the macro uncertainty facing automakers to look any further ahead than the current year. Tesla is currently trading at a 64x earning multiple, which is well above a normal car company that would in the 6 to 10x earnings range; however, Tesla has never traded down to that level and while the results were weak, they were still able to earn money in the last quarter. Tesla’s retail shareholder base is very supportive of the company, as have option traders, which is often one of the most traded options each week.

I believe this will mean that the car multiple will not be in play until such time, if ever, the company faces a cash crunch like GM/Chrysler/Nissan did. Tesla should see some multiple contraction, but I would assume that it reverts to more of a market multiple, currently sitting at 27.4x earnings. This would place the current fair valuation at $67/share on 2024 earnings, and $89/share if you want to take the higher 2025 earnings level.

Risks

The biggest risk to the above thesis is if this slowdown proves simply to be a dip in sales, that the consumer rebounds and the EV revolution restarts after a brief pause. This would allow Tesla to work through the inventory (which appears to be potentially at a lower cost) and recover its working capital investment. The macro layout with rising inflation and slowing global economy would seem to counter this, but it cannot be ruled out that the economy recovers either naturally or through fiscal and monetary intervention.

The Takeaway

Rising inventory in a car company is not a good thing due to the sheer amounts of capital that gets tied up in it. The decision to make some substantial layoffs and the upheaval associated with it may be some “pruning” of inefficiencies as management indicated on its conference call, but it has a component of a demand issue as well which would appear to be more than just temporary. Tesla should be able to better match its production to demand now, but with a lower production rate, it has a lower base to allocate its fixed costs over, which will necessarily provide an upward pressure on its cost per car.

On the plus side, it looks like they are making some strides in cost reductions as we are seeing lower average cost per car which, if this turns out to be a short lull in sales, will set them up for some margin expansion if this trough reverses itself. At worse, it will mitigate the financial effect if they continue to see weakness in demand going forward.

At this point, I don’t see a way to take a long position in Tesla, Inc. stock; I have usually kept a put position open on the stock as a hedge on my other long positions due to its elevated valuation. However, if you are long the stock, I’m not sure that one quarter is a death sentence either, especially if they have been able to reduce their costs. This would allow earnings to rebound if they reach a point where price cuts are no longer needed.