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Unexpectedly, Tesla's biggest enemy comes from inventory.

Recently, Tesla experienced an undercurrent that should not be underestimated — inventory backlog. This undercurrent not only blurred Tesla's growth trajectory, but also severely tested its high valuation (price-earnings ratio of up to 67 times).

Tesla was once known for its speed of innovation and growth, but now it's stuck in an inventory quagmire. Starting in 2021, Tesla's inventory soared from around $5 billion to an astonishing $16 billion in just three years. This is not only a digital leap, but also a huge turning point in Tesla's business strategy. With the rapid expansion of the business, an increase in inventory is a matter of course, but only if sales grow at the same time. However, reality gave Tesla a loud slap in the face. Since the beginning of 2024, Tesla's sales have not soared as expected; on the contrary, it is in stark contrast to the increase in inventory.

More worryingly, Tesla's inventory days (DOJO) has reached a record 77 days. You need to know that until 2024, this figure remained stable at an average of around 57 days. This surge in inventory is not due to weak demand for automobiles, but to the complexity and uncertainty of global logistics networks. Tesla cars are like being trapped in a huge maze, unable to successfully find their way to consumers.

Imagine rows of brand-new cars parked neatly in Tesla's Gigafactory parking lot. They are supposed to ride on the road, bringing a convenient travel experience to car owners. However, now these cars can only wait quietly in the parking lot, as if they were orphans forgotten by time. What's even more exaggerated is that, according to people familiar with the matter, these parking lots have become overcrowded, and you can even see their huge presence from space.

Tesla's woes are not without omens. Earlier, Tesla's chief financial officer Vaibhav Taneja confessed: “The main factor behind this situation is the increase in inventory due to mismatched construction.” He tried to give investors a confident promise: “We expect inventory to reverse in the second quarter and free cash flow to return to a positive value again.” However, reality gave him a loud slap in the face.

Over the past quarter, Tesla has produced more than 433,000 cars, yet only 386,000 units have been delivered. This means that about 47,000 unsold cars are piled up in Tesla's warehouses. This inventory not only takes up large amounts of cash, but also poses a huge risk to Tesla's balance sheet. Tesla reported negative free cash flow of $2.5 billion in the previous quarter, a figure that was enough to shock and unease investors.

Tesla's plight is more than just an inventory backlog. It is also a complex issue relating to supply chains, market demand, capacity planning, etc.

1

The difficulties faced are more serious than expected

Tesla was once an unrivaled Mustang, leading the trend of the entire industry with its astonishing speed of innovation and excellent performance. However, now the wild horse seems to be stuck in a quagmire. Inventory, which may seem like a simple problem, has become Tesla's biggest enemy right now.

Not long ago, Tesla handed over an impressive report card: in one quarter, Tesla produced more than 433,000 cars, a figure that is enough to put any competitor in the dust. What is shocking, however, is that only 386,000 vehicles were delivered. This means that about 47,000 unsold cars are piled up in Tesla's warehouses. These cars, like treasures forgotten by time, lie quietly in the corner of the warehouse, awaiting the judgment of fate.

This huge inventory backlog is certainly a heavy blow to Tesla. It takes up a lot of cash and poses a huge risk to Tesla's balance sheet. To make matters worse, Tesla's cash flow situation has also been seriously affected due to inventory backlogs. Free cash flow for the previous quarter was negative $2.5 billion, according to the company. This number, like a loud slap in the face, hit Tesla.

In the face of such a serious situation, Tesla's chief financial officer tried to bring a glimmer of comfort to investors. He said with full confidence that the inventory backlog is expected to be reversed in the next quarter, and free cash flow will once again return to a positive value. Analysts, however, are skeptical. They believe inventory backlogs are a more enduring problem and are likely to last longer. This skepticism is not out of thin air, and Tesla's inventory data already clearly reflects this.

Tesla's inventory problem has had a bigger impact than expected. Analysts expect Tesla's sales to fall short of the recently recorded increase in deliveries of around 30% or more due to slowing sales growth. This slowing growth outlook has brought Tesla's premium valuation into question. Furthermore, as competition intensifies, sales prices fall, and operating expenses increase, Tesla's bottom line growth rate is likely to be lower.

Let's take a look at the analysts' predictions for Tesla over the next few years. According to popular forecasts, Tesla's earnings per share will fall 18.56% to $2.54 in the 2024 fiscal year. This forecast is shocking because Tesla has always been a high-growth company in the eyes of investors. The reality, however, gave investors a resounding slap in the face. Even if Tesla's earnings per share can grow at a compound annual growth rate of 19% over the next five years, its price-earnings ratio (PEG) growth rate (PEG) is still more than 3.5 times, far higher than the 1 times gold standard growth investors seek.

In addition to financial problems, Tesla is also facing other difficulties. As a high-tech growing company, Tesla needs to increase its R&D efforts to maintain its leading position. However, currently Tesla spends around 4.6% of its revenue on R&D, which is still low compared to its historical average or other high-tech companies. This means that Tesla's investment in R&D may not be sufficient to cope with increasing competition.

Additionally, Tesla also needs to effectively control its operating expenses. Tesla's operating expenses have been rising rapidly in recent quarters. While the company has several cost control plans to improve operational efficiency and reduce the cost per vehicle, the effectiveness of these plans remains to be seen under pressure from high labor costs, material costs, and energy costs.

2

Tesla's sales have plummeted

A recent Sherwood News report revealed the hidden concern behind Tesla's inventory backlog — declining sales.

The Nevada Tesla Gigafactory in Texas. According to comparative images provided by SkyFi Satellite Imaging Service, from October 2023 to March 2024, the factory's surrounding parking lot underwent an amazing transformation from being partially full to completely full. In October 2023, the parking area in the lower left corner of the factory was still empty, and the parking area in the center on the right had a parking rate of only 17%. But after just a few months, by March 2024, parking rates in these two areas had soared to an astonishing 34% and 97%!

This isn't just a problem with the Texas Gigafactory. Elsewhere in the US, Tesla is facing the same dilemma. Take the parking lot outside the Chesterfield Mall in St. Louis as an example. Satellite images provided by Sherwood News show that this parking lot was still empty in October 2022, but by May 2024, it was already full of nearly 500 Tesla cars. Like a silent tombstone, these slow selling vehicles speak without words about the harsh reality of Tesla's declining sales.

Faced with this situation, an automotive supply chain practitioner couldn't help but lament: “In order to reduce costs, car companies often expand production capacity ahead of schedule. But it's like walking a tightrope; if you're careless, you'll get into trouble because of overproduction.” Tesla is one such example. Although it has long been the leader in the US electric vehicle market, it is now in a difficult situation where sales fall short of expectations.

Judging from the share of sales in the global market, Tesla's plight is even more obvious. In the first quarter of 2024, although Tesla's share of sales in the US tram market was still as high as 51.3%, its sales volume fell 8.53% year on year, down 20.2% from the fourth quarter of last year. This means that Tesla's growth momentum in the US market has clearly slowed.

At the same time, the entire US electric vehicle market also experienced its first decline in four years. According to the analysis company Wards Intelligence, in the first quarter of 2024, the share of hybrid vehicles, plug-in hybrid electric vehicles, and pure electric vehicles in total light vehicle sales in the US fell to 18.0% from 18.8% in the fourth quarter of 2023. This downward trend has affected not only Tesla, but the entire electric vehicle industry.

So, what exactly is causing Tesla's sales to decline? An industry insider gave the answer. On the one hand, American consumers have limited acceptance of electric vehicles. Compared with hybrid models and fuel vehicles, pure electric vehicles are still lacking in terms of cost performance and convenience. On the other hand, American consumers prefer models such as SUVs and pickups, which are relatively rare in the field of pure electric vehicles.

This trend is also confirmed in the 2024 Consumer Preferred Car Rankings published by Consumer Reports. In the top 10, 6 models are all hybrid models, while only one pure electric model, Model Y, is on the list. This ranking certainly sounded a wake-up call for Tesla — in a market where consumers are increasingly picky, Tesla must continue to innovate and improve to maintain its leading position.

The problem of Tesla's declining sales and inventory backlog is imminent. Faced with this difficult situation, Tesla must take effective measures to deal with it.

3

There are no new models of the Model Y, the main sales force

Recently, Tesla CEO Musk made it clear on social media that the “facelift” model of the Model Y will not be launched this year. Not only did this news disappoint countless Tesla fans, but it also made Tesla's inventory backlog problem worse.

Model Y is Tesla's sales pillar in the Chinese market, and has always attracted many consumers with its excellent performance and stylish appearance. However, in this age of rapid renewal, if a model fails to maintain continuous innovation and progress, it is easy to be left behind by competitors.

Let's first take a look at Tesla's performance in the Chinese market. As Tesla's second-largest market in the world, in the first quarter of 2024, Tesla's retail sales in China reached 132,400 units. This figure may seem huge, but it is down 3.64% year on year. By May, Tesla's Shanghai Gigafactory had delivered 72,573 new cars, and sold more than 55,000 units in China, up 77% month-on-month and 29.9% year-on-year. Although this figure may seem impressive, sales fell 0.5% in the first 5 months. This trend can't help but make people worry about Tesla's future.

So what is the reason for Tesla's sales decline? An auto analyst at Western Securities gave the answer: “In the domestic market, many car companies regularly launch modified models to maintain freshness. However, Tesla appears to be too conservative; it may only be remodeled once every two or three years. Although the new Model 3 high-performance version was released in April, it is difficult for this model to impress consumers from positioning to price.”

As Tesla's main sales force in the Chinese market, the Model Y has received close attention from the market. According to data, the Model Y sold about 104,400 units in China in the first quarter of this year, accounting for 80% of Tesla's total sales. However, in the face of such an important model, Tesla chose not to launch a facelift model this year. This decision has undoubtedly worsened Tesla's inventory backlog problem.

Musk explained on social media that Tesla continues to upgrade existing vehicles through OTA and other methods, and Tesla vehicles will improve significantly in many areas every six months. However, this explanation did not seem to convince consumers. In today's environment of increasingly fierce competition in the NEV market, consumers are increasingly eager for new models and new technologies. And Tesla's “conservative” strategy certainly puts it at a disadvantage in the competition.

In addition to slow product upgrades, Tesla is also facing competitive pressure from the domestic NEV market. Today, a number of excellent car companies and models have emerged in the domestic NEV market. Models such as the Xiaopeng G6, Zhiji LS6, BYD Song L, and Ledao L60 all compete fiercely with Model Y. Meanwhile, new models that are about to enter the market, such as the Xiaomi pure electric SUV and the Avita 07, have made Tesla feel more pressure than ever before.

In such a market environment, Tesla's declining sales volume and inventory backlog problems are even more difficult. Faced with constant challenges from competitors and increasingly picky consumers, Tesla must find a solution as soon as possible. Otherwise, this former frontrunner may be left behind in the future.

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