Tesla's Problem is Fading Demand, Not Disruptive Factory "Updates"
Factory shutdowns for "updates" don't explain Tesla's huge Q3 miss on deliveries because bloated excess inventory was enough to cover the 20k "miss" some 3-5x. Accelerating demand erosion does.
Tesla TSLA 0.00%↑ shocked investors early Monday with the news that third quarter deliveries came in at 435,059, up almost 27% y/y but down sharply versus 466,140 in the second quarter.
Results fell roughly 20,000 short of plunging market consensus estimates, which had landed near 455,000 (up 32% y/y) by Sunday night. Even that large gap doesn’t adequately grasp just how badly Tesla trailed the market’s typically ebullient expectations, as I noted last night about the market’s latest projection:
That’s down versus 475,000 (up 38% y/y) estimated at the start of the quarter and sharply lower versus 485,000 (up 41% y/y) estimated at the beginning of the year—and a whopping 520,000 (up 51% y/y) projected last year when investors generally expected Tesla sales would grow by more than 50% per year for the foreseeable future.
Tesla Q3 Deliveries Are Looking Ugly, 10/1/23
Even my well below market estimate was too generous:
I had projected Q3 deliveries at flat to down 5% versus the surprisingly strong second quarter when deliveries hit 466,915, up 8% versus the first quarter and up 87% y/y (see Tesla Q2: Solid Beat, At Any Cost, 7/5/23).
I was concerned that Tesla’s inventories had remained stubbornly elevated all year despite multiple rounds of increasingly severe price cuts juiced with pricey incentives. If so, there was a good chance that Tesla had pulled off the surprise beat in the second quarter by clawing demand forward—at the expense of third quarter results.
Sure enough, even with prices down a hefty 20-30% and more versus the first of
the year, inventory remained bloated until late in the third quarter when Tesla actually shut down production for “updates.” I suspect said updates were a cover story for fires sales aimed at moving metal at any cost. We'll see.
In any case, Tesla was able to finally clear out stalled inventory, but demand has continued to fade. I peg third quarter deliveries at just under 448,000, down 4% versus the hot second quarter. This is still up 30% versus what had been a disappointing Q3 last year when deliveries also trailed ambitious market estimates.
Tesla Q3 Deliveries Are Looking Ugly, 10/1/23
Tesla bulls were quick to point out that, of course, deliveries would lag this quarter because Elon Musk had announced in the second quarter call a “a slight decrease in production in Q3 for sort of global factory upgrades” and that “ demand has roughly tracked production.”
Except that slight decrease turned out to be a 10.3% drop in production to 430,488 versus the second quarter, with deliveries down 7% in a quarter which historically trends higher sequentially by double digits.
So demand did “roughly track production”—sharply lower, which is not been what we previously had observed. Significant overproduction had created bloated excess inventory that grew sharply higher every quarter over the past year as Tesla continued to substantially overestimate demand.
Apart from the surprise beat in Q2, Tesla’s deliveries have trailed even falling market consensus estimates every quarter for more than a year.
As a result, Tesla’s long-term cumulative excess inventory (cars produced less cars delivered) had jumped marked in Q3 last year to 42,617, which grew rapidly in nine months to 108,533 at the end of Q2 this year. Even the trailing LTM total had jumped to 88,009 over the same period.
When even a cumulative 30% price drop over nine months plus expensive incentives failed to reverse this trend, Tesla decided to shut down production late in Q3. Whether or not Tesla actually needed to stop the presses to conduct factory updates, this was the first quarter since Q1 in 2022 when Tesla actually sold more cars that it produced—albeit by a mere 4,571.
This still left long-term cumulative excess inventory at 103,962 cars—more than 5x the 20,000 shortfall versus market estimates. The LTM excess was 61,345 cars, which is more than 3x the miss.
Either way, Tesla clearly had more than enough cars gathering dust ready to sell.
It is Tesla’s buyers who are disappearing, which tracks with recurring and deteriorating same store trends I warned would negatively impact the second half of this year:
Indications are Tesla’s demand and pricing pressure will only grow through 2023 and beyond, and we saw how heavily that weighed on revenue, profit, and cash flow in disappointing fourth quarter results (see Tesla Q4: Stalling Growth, Shrinking Margins, Weaker Guidance, Mystery "Investment" on 1/29/23).
Moreover, other than maybe Q2 this year, Tesla has run out of comparatively easy comps. So I am skeptical that Tesla has solved its demand problems with dramatically large price cuts in the latest wave following several cuts and increased incentives in recent months. This suggests to me substantially increased concern from Tesla about sales growth, if not desperation—not a sales triumph. It also explains why Tesla has backed off two years of guidance calling for better than 50% y/y growth in deliveries, with management’s target indicated at 37% for 2023.
In response, Tesla makes its problems worse.
Tesla has stubbornly compounded its problems for several years now by starving investment into new models that could take up the baton. Instead it continues to produce the same paltry and increasingly aging fleet of just four models still largely based on its vintage 2012 Model S. Even worse, Teslas still persistently rank near the bottom every year in quality and reliability—plus terrible customer service.
No wonder recalls and government investigations and lawsuits against Tesla have been piling up.
Tesla's Still Bloated Inventory Signals June Sales May Disappoint, Along With Q2 Market Estimates, 5/30/23
Now What?
So, what happens in the fourth quarter? More of the same, it looks like. Tesla has already initiated more price cuts and introduced lower priced versions of Models 3, including the Highland, and Y equipped with fewer features and lower range.
If Tesla’s historic trends hold, and they probably will, these “updated” models will likely cannibalize existing model sales rather than augment growth, and, since they also be competing with Tesla’s own heavily discounted stagnant inventory, will likely trigger even lower pricing (see Tesla's Demand Problems Aren't Going Away, 1/31/23.)
This also comes just as Tesla has been caught lying via rigging range estimates on its cars and then suppressing customer complaints, which has triggered more of already numerous government investigations.
The long overdue and dramatically over-promised Cybertruck is still delayed, despite Elon Musk’s latest claims that it would go into commercial production in the third quarter. We are not surprised. Moreover, I still believe the quirky, troublesome Cybertruck seems destined to disappoint—but that’s a story for another day.
In any case, rehashed dated models and ill-conceived boy toys probably won’t be enough to change Tesla’s prospects, certainly versus scores of competing new models from strong rivals recently launched or due out in coming months.
If so, I expect still dramatically ambitious market estimates for Q4 deliveries to drop compared with the latest consensus of 513,000, up 27% y/y and up 18% versus the disappointing Q3 result. This would put full year deliveries at 1,837,000 (up 40%).
While this still implies much weaker that normal sequential and y/y growth, I suspect Tesla may be lucky to meet the Q2 levels. I estimate Q4 deliveries at at 466,140-474,214, which is up 15-17% y/y and up 7-9% versus Q3. This assumes deliveries for the year come in just under 1.8 billion, up 36-37% (see attached model). If so, this indicates Q4 revenue at $25.2-25.6 billion (up 3.5-5.3% y/y), EBITDA at $4.16-4.22 billion (16.5% margin; down 570 bps) and net income at $2.3 billion, (down 38-39% y/y).
Third quarter earnings results are expected October 18th. I estimate Q3 revenue at $23.3-25.6 billion (up 9%-10%), EBITDA at $3.84 billion (16.5% margin, down 670 bps) and net income at $2.1 billion (down 37% y/y)—each the lowest in a year or more.
Stay tuned.
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Hi Ms. Bryan...
I would love to know just how much CASH is in the Piggybank at TSLA.
It seems likely that 'Cash on Hand' has undergone a 'hedonic adjustment' in the financial reporting at TSLA. Hopefully, Mr. Kirkhorn will provide some clarity on this topic to inquiring minds in the Southern District of New York.