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Tesla's New Vehicle Inventory Skyrockets
Jul. 10, 2017 2:59 PM•TSLA
Summary
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 Q2statement 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, Q42016, 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.)
Antonio M. Sacconaghi- Sanford C. Bernstein & Co. LLC
“... OK. Thank you. I was wondering also, your customer deposits, and I recognize there's a lot in that, declined for the second straight quarter, and at least by my math, it appears as though Tesla's new car inventory has increased substantially over the last couple quarters,maybe 3,500 units, or about 50%, even though sort of production and deliveries have been relatively constant….”
Deepak Ahuja - Tesla Motors, Inc.
“Yeah, Deepak here. A couple of questions that you had. Firstly just to clarify, our finished vehicle inventory only increased very slightly from end of Q4 to end of Q1, and we are using some of that in different ways, and Jon can explain that further… …And Jon, you want to add on the...?
Jonathan McNeill - Tesla Motors, Inc.
That's right. The increase in inventory is about split in two. One is we increased Model X test drive vehicles by about a thousand over the past quarter. We had prioritized deliveries as we've ramped up Model X production, and prioritized getting cars to customers first, and to our stores second. Our stores have finally gotten their test drive fleets. And that's what you see in terms of half of the unit volume increase. The second half is in our service loaners. So as our installed fleet has gone up, we wanted to make sure that our owners were getting a service loaner, and so we will continually increase that, and you'll see that over time. That's not a one-time event, you'll see, as we continue to deliver this level of cars per quarter, that we will increase the service loaner fleet proportionately, so that we've got the ability to offer a Tesla to our customers.
Elon Reeve Musk - Tesla Motors, Inc.
“Yeah, in fact this will take us a few months to fully deploy. But our policy for service loaners is that the service loaner fleet will be the very best version of a Tesla that is available. So if you have a Model X that comes in for service, the service loaner you will get will be the absolute fully loaded state-of-the-art P100D Ludicrous best Model X that we have. The same for the Model S. So it'll be the kind of thing where you hope that service takes a long time, because you have the absolute top of the line Tesla as a service loaner.”
Amazing right? I got excited when I first heard the question. Antonio Sacconaghi nailed the issue! His number was not far off my calculations. But then I was stunned when Deepak Ahuja made the statement, “… our finished vehicle inventory only increased very slightly from end of Q4 to end of Q1.” Bull dung! Since when is 3,500 units representing 50% “increased very slightly?” How many is a large amount in Mr.Ahuja’s thinking? Anyone tracking the numbers knew his statement was incorrect.
It was almost comical when Jonathan McNeill gets on the call, contradicts Deepak Ahuja, confirms the inventory increase, and begins to explain why the inventory actually is swelling by at least 2,000 units.
Not to be outdone, Mr. Musk jumps into the mess claiming no matter what car version you bring in for service “you will get the absolute fully loaded, state of the art P100D Model S or X.” He is saying if a customer drives in for service with a three-year-old Model S60 that originally cost about $70,000, that customer gets a fully loaded $160,000 2017 P100D loaner for as long as the customer can drag it out.
These men seem to have no concept of cost controls. This policy is pure waste. Why not use late model CPO units as service loaners? I mean the customers are using them for free! If Tesla was swimming in profits I could see cutting management a little slack. But not when this company is drowning in red ink. Recently departed CFO Jason Wheeler would have been astonished if he was still around. Mr. Ahuja, well he seems to see the numbers...differently.
What is going on at this company? Does anyone even care?
This unsold inventory is still growing. I have not been able to find any information on production slowdown at Tesla. If production remains at about 25,000 units in Q3 for Model S and X combined, we could see over $1 billion in accumulated new vehicle inventory over the five quarters ending September 30, 2017.
Then we have the issue of pushing more units into test drives. If sales are plateauing as they have been since Q3 of 2016, why do we need even more test drive units? The same goes for service loaners. Are we short service loaners? If so, why? Are more units coming in for service then were anticipated? The narrative had been that these cars were virtually maintenance free. So why did Tesla push thousands more into service? I hope Tesla will not be giving a Model 3 buyer a P100D Model S when their car comes in for warranty work. That’s like giving a Lexus to a Corolla owner.
So what is the real story?
Could it be that in a rush to conceal a growing inventory, the idea was developed to push thousands of units into “service” in one way or another, and then claim it was always intended? Hopefully an analyst on the next conference call will speak up and ask these questions. Perhaps analyst David Tamberrino will read this article and make a few notes. Mr. Musk deemed his last question "not material." Maybe he can extract better answers on the August conference call.
Disclosure: I am/we are short TSLA.
") center center no-repeat; text-align: center;">
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 am/we are short via PUT options
Jul. 10, 2017 2:59 PM•TSLA
Summary
- Revised In-Transit figures released Friday paint a bleak picture.
- As inventory has skyrocketed, Tesla has not adjusted production accordingly.
- What is the real reason for moving thousands of units into use as service loaners and test drive vehicles?
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 Q2statement 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, Q42016, 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.)
Antonio M. Sacconaghi- Sanford C. Bernstein & Co. LLC
“... OK. Thank you. I was wondering also, your customer deposits, and I recognize there's a lot in that, declined for the second straight quarter, and at least by my math, it appears as though Tesla's new car inventory has increased substantially over the last couple quarters,maybe 3,500 units, or about 50%, even though sort of production and deliveries have been relatively constant….”
Deepak Ahuja - Tesla Motors, Inc.
“Yeah, Deepak here. A couple of questions that you had. Firstly just to clarify, our finished vehicle inventory only increased very slightly from end of Q4 to end of Q1, and we are using some of that in different ways, and Jon can explain that further… …And Jon, you want to add on the...?
Jonathan McNeill - Tesla Motors, Inc.
That's right. The increase in inventory is about split in two. One is we increased Model X test drive vehicles by about a thousand over the past quarter. We had prioritized deliveries as we've ramped up Model X production, and prioritized getting cars to customers first, and to our stores second. Our stores have finally gotten their test drive fleets. And that's what you see in terms of half of the unit volume increase. The second half is in our service loaners. So as our installed fleet has gone up, we wanted to make sure that our owners were getting a service loaner, and so we will continually increase that, and you'll see that over time. That's not a one-time event, you'll see, as we continue to deliver this level of cars per quarter, that we will increase the service loaner fleet proportionately, so that we've got the ability to offer a Tesla to our customers.
Elon Reeve Musk - Tesla Motors, Inc.
“Yeah, in fact this will take us a few months to fully deploy. But our policy for service loaners is that the service loaner fleet will be the very best version of a Tesla that is available. So if you have a Model X that comes in for service, the service loaner you will get will be the absolute fully loaded state-of-the-art P100D Ludicrous best Model X that we have. The same for the Model S. So it'll be the kind of thing where you hope that service takes a long time, because you have the absolute top of the line Tesla as a service loaner.”
Amazing right? I got excited when I first heard the question. Antonio Sacconaghi nailed the issue! His number was not far off my calculations. But then I was stunned when Deepak Ahuja made the statement, “… our finished vehicle inventory only increased very slightly from end of Q4 to end of Q1.” Bull dung! Since when is 3,500 units representing 50% “increased very slightly?” How many is a large amount in Mr.Ahuja’s thinking? Anyone tracking the numbers knew his statement was incorrect.
It was almost comical when Jonathan McNeill gets on the call, contradicts Deepak Ahuja, confirms the inventory increase, and begins to explain why the inventory actually is swelling by at least 2,000 units.
Not to be outdone, Mr. Musk jumps into the mess claiming no matter what car version you bring in for service “you will get the absolute fully loaded, state of the art P100D Model S or X.” He is saying if a customer drives in for service with a three-year-old Model S60 that originally cost about $70,000, that customer gets a fully loaded $160,000 2017 P100D loaner for as long as the customer can drag it out.
These men seem to have no concept of cost controls. This policy is pure waste. Why not use late model CPO units as service loaners? I mean the customers are using them for free! If Tesla was swimming in profits I could see cutting management a little slack. But not when this company is drowning in red ink. Recently departed CFO Jason Wheeler would have been astonished if he was still around. Mr. Ahuja, well he seems to see the numbers...differently.
What is going on at this company? Does anyone even care?
This unsold inventory is still growing. I have not been able to find any information on production slowdown at Tesla. If production remains at about 25,000 units in Q3 for Model S and X combined, we could see over $1 billion in accumulated new vehicle inventory over the five quarters ending September 30, 2017.
Then we have the issue of pushing more units into test drives. If sales are plateauing as they have been since Q3 of 2016, why do we need even more test drive units? The same goes for service loaners. Are we short service loaners? If so, why? Are more units coming in for service then were anticipated? The narrative had been that these cars were virtually maintenance free. So why did Tesla push thousands more into service? I hope Tesla will not be giving a Model 3 buyer a P100D Model S when their car comes in for warranty work. That’s like giving a Lexus to a Corolla owner.
So what is the real story?
Could it be that in a rush to conceal a growing inventory, the idea was developed to push thousands of units into “service” in one way or another, and then claim it was always intended? Hopefully an analyst on the next conference call will speak up and ask these questions. Perhaps analyst David Tamberrino will read this article and make a few notes. Mr. Musk deemed his last question "not material." Maybe he can extract better answers on the August conference call.
Disclosure: I am/we are short TSLA.
") center center no-repeat; text-align: center;">
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 am/we are short via PUT options
