Apr 8 2020 - Tesla Unsold Inventory Soars 112%

Summary

At the end of Q1, Tesla had the largest inventory of unsold units in its history.

Based on reported shipments and deliveries, a large portion of this unsold inventory appears to be in Europe.

The upside is Tesla has at least a month's worth of inventory to cushion a prolonged factory shutdown.

In the latest delivery report released on Thursday, Tesla, Inc. (TSLA) beat most analysts' delivery estimates by handing ownership over to about 88,400 customers in Q1 (Form 8-K filing is here). This was, as expected, a record for any 1st quarter. It easily beat 1Q19 since Model 3 deliveries did not begin in Europe and China until mid-February last year, so Tesla's numbers benefited this year from worldwide deliveries of Model 3 for the entire month of January and early February.

However, the ratio of vehicles built versus delivered in the quarter was the worst since 1Q19. While Tesla indeed delivered 88,400 units, it represented 86% of the total production of 102,672 vehicles resulting in a surplus of 14,272 units. Combined with excess inventory from prior quarters, Tesla's unsold inventory spiked to 26,961 units, an increase of 112% from 4Q19.

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The raw data in the spreadsheets below bring several interesting facts to light. We will start with Model 3 & Y.

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All charts and graphs by the author

First, we can see the huge increase in unsold units that soared 120%. Part of this increase occurred in China in Jan/Feb where Model 3 deliveries were 83% of production (5,487 deliveries vs. 6,583 units produced. We are still a few weeks away from verifiable March numbers). Europe also appears to have ended with a large surplus inventory. During the quarter, seven ships transported units to Zeebrugge, Belgium with a few continuing on to Southampton, England. TeslaMotorsClub.com member Troy does an excellent job of pulling verifiable data together to track most European sales. For Q1, his spreadsheet (here) shows 22,728 deliveries which are almost identical to 2019 at 22,759. Norway and The Netherlands have been replaced in the top spot by the U.K. This may not account for other smaller EU markets. But if each ship carried an average of 4,000 Tesla vehicles, we can see that a good portion of these unsold units is probably sitting in Europe, waiting to be delivered to buyers in Q2 due to the coronavirus shutdowns in many of those countries.

Second, in the press release last week, Tesla oddly chose to combine Model 3 with Model Y production and delivery figures. Some would think they did this to hide relatively low figures for Model Y out the gate. But if we look back to 3Q17, in the above chart, Tesla had no problem reporting just a few hundred cars in Model 3's initial quarter. It would seem Tesla is actually trying to mask the severe drop in Model 3 global sales which were the worst in a year since Q1 2019. That number last year was unusually low for several reasons. First, 4Q18 marked the end of the full ,500 FITC in the U.S. which pulled Q1 sales forward into Q4. Second, Model 3 deliveries in both China and Europe did not begin until about halfway through the quarter in mid-February. This, of course, made 1Q20 deliveries look better in a YoY comparison.

It has been and still is my belief that moving the introduction of the Model Y forward to March from later in the year was due to the slowing of orders for the Model 3 and to fill a drop in revenue that Tesla has known was coming in the first half of 2020. This became very clear last year when total U.S. revenue dropped .2 billion from 2018 levels.

Now let's look at Model S and X results for 1Q20 using my updated table.

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Only twice, going all the way back to late 2016, have Tesla Model S and X deliveries fell below 15,000 units. First, in Q1 last year for the same reason as Model 3 which was the end of the full FITC in the U.S., and now, again, in Q1 this year. After a decline in inventory levels for three straight quarters amid slowing production, Tesla has once again overbuilt these models. Unsold inventory nearly doubled, up 93%. Despite proven slowing demand for these models, Tesla chose to increase production by more than 1,000 units in Q1 YoY. Since Tesla continues to conceal sales numbers and inventory by country, it is impossible to know where these units are located.

If we now combine these spreadsheets, we have the total shown below.

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The numbers, clearly, show what a dramatic rise in unsold inventory Q1 represents. We can also spot a few other curious items.

Despite a two-week shutdown at the Shanghai plant and a closing down of Fremont from March 24th onward, Tesla appears to have ramped up production throughout the quarter. Early in the quarter, CEO Elon Musk brushed off any concerns about the growing spread of COVID-19, and it was clear he never expected the drop in sales that developed around the world.

Looking forward

2Q20 will likely show the largest percentage drop in sales QoQ in Tesla's history. The same goes for most other automotive OEMs around the world. So, what does that say about the future for Tesla?

While Tesla expected to take the Chinese market by storm, Tesla captured just 8% of the Chinese NEV market in the first two months of 2020 with total sales of 5,467 Model 3 units. The numbers for S and X were so low that they did not even rank in the top 20 models. Registrations in February (as linked above from InsideEVs) were just 29 Model X and a single Model S.

Increased nationalism could become a roadblock for Tesla sales in the coming recovery. In China, for example, many NEV manufacturers are in dire straits. Sales dropped 65% in February despite China announcing plans to allow subsidies and sales tax credits to continue an additional two years. What China did not do was increase the subsidies back to pre-July 2019 levels. Despite Model 3 eking out the first place position through February, Chinese models are by far the favorites of buyers there with foreign brands commanding a very small percentage of total sales. Rallying around their national brands and models could get stronger in a weakened economy in 2020.

European nations like The Netherlands changing policies pushed Tesla down from first place in 2019 to third place in Q1 this year behind Toyota (NYSE:TM) and Kia (OTCPK:KIMTF). The Netherlands accounted for a large spike in sales in the second half of last year. With that incentive policy ending on 12/31/19, Tesla could be hard-pressed to break 100,000 European units in 2020.

In Norway, increasing competition appears to be what knocked Tesla from first place in EV registrations in 2019 to fifth place in 1Q20 behind Audi (OTCPK:AUDVF), VW (OTCPK:VWAGY), Nissan (OTCPK:NSANY), and Hyundai (OTCPK:HYMLF). This chart shows just how bad the shift away from Tesla products has become. Where once Model S and Model X dominated EV sales, they barely register today. The Audi e-Tron which easily took first place in Q1 continues to soar in early April. So far, in April, with just 13 registrations, Model 3 has fallen to 17th place in EV sales for the month.

Conclusion

Does this mean Tesla is doomed? Of course, not. Tesla has earned itself a rightful place among the top OEMs in the world. However, the unrealistic growth expectations many analysts and investors have been banking on are just not developing as expected, with or without the impact of the coronavirus pandemic.

With the European sales trajectories in evidence so far this year, it does raise the question of Elon Musk's judgment in pushing forward with a new factory in Berlin. Does recalling all American personnel from there mean he has seen the light? I highly doubt it. Much like President Trump who did not change his position on the COVID-19 outbreak until the facts were too obvious to ignore any longer, Mr. Musk is likely to charge forward with the Berlin factory, burning billions of dollars that the plant's production may never recoup.

I would also predict that Mr. Musk's statement that the Shanghai factory would only produce cars for China sales will be altered as well. In order to meet the upcoming tax payment obligations to the Shanghai government, Tesla may have no choice but to export cars from there to other Asian countries possibly building both RH and LH drive models as is done now at Fremont (once it reopens production). The factory must reach the highest level of production possible (with corresponding sales of course) to justify its continued existence.

The point investors must accept is Tesla is a player in a rapidly changing global marketplace. Blinding themselves to the ongoing changes and impacts to future growth while holding onto expectations of a ,000-7,000 future stock price is foolhardy and financially dangerous.

Up until February, our family fund had been a decades-long large shareholder of Ford (F) stock. We had to accept the global position for Ford was declining along with the stock price. Despite the "buy and hold" mentality of several family members selling out has proven to have been the right move. My point being, market changes require an open and adaptable attitude to assure trading success. When 2020 is in the history books, this will have been proven an absolute fact.

While trillion stimulus packages sound great and spiked the markets out of a downward spiral, getting the money where it is needed is another matter altogether as our states and government agencies are finding out. There could be hundreds of thousands of business failures globally simply due to changes in attitudes among consumers. Many people may never get back to the carefree mindset they held in 2019. The long-term effects of the resulting economic meltdown from this pandemic will be unlike anything people have experienced since the Great Depression and it may very well affect how they budget and spend their money going forward. That could prove dangerous to providers of high end, luxury goods who could see their market shares permanently shrink.

Disclosure: I am/we are short TSLA THROUGH OPTIONS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I strongly discourage the shorting of stocks, TSLA in particular which is a highly volatile issue. I use options that allow me to limit losses to the cost of the options contracts but provide far greater opportunity for gains. This has been my personal experience but is in no way a recommendation to others. I suggest everyone choose an investment strategy suited to individual tastes and risk comfort level.

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