All eyes in the automotive community were focused on the Tesla (TSLA +3.37%) investor relations page this weekend. The disruptive manufacturer of electric vehicles (EVs) released its quarterly production and deliveries update, which gives investors and industry analysts the chance to track how much the company grew in the prior quarter.
As it has done for many years now, Tesla reported growing deliveries to customers, up approximately 36% year over year. However, this came well short of CEO Elon Musk's stated goal of 50% year-over-year growth, even as the company implemented multiple cost cuts to start 2023.
Despite this delivery growth, I wouldn't get near Tesla stock as an investor right now. Here's why.
Production outpaces deliveries (again)
One concern I have with Tesla is that its production levels continue to outpace deliveries to customers. In 2022, the company produced 55.8k more cars than it delivered. In Q1, this trend continued, with 17.9k more cars produced than delivered to customers, bringing the production-to-delivery gap up to around 74k in the last five quarters.
This is a basic supply/demand imbalance that has two major consequences. First, it indicates that Tesla is struggling to find enough buyers for its vehicles across the globe as it scales up its manufacturing to millions of cars a year. This is a bad sign for a company looking to become an automotive giant.
Second, it means that Tesla is increasingly holding vehicle inventory on its balance sheet. While that's not a terrible thing in a vacuum, Tesla's used-car prices have declined by 22.5% in the last year.
The EV-maker has started to slash prices for its new vehicles, as well, so all these vehicles sitting as inventory on Tesla's balance sheet are going to sell at lower prices than they would have in 2021 and early 2022. This will negatively impact the company's growth.
TSLA Operating Margin (TTM) data by YCharts.
Earnings about to head in the wrong direction
The key reason for Tesla's meteoric stock rise -- aside from generally bullish speculation from investors -- was the company's ability to keep its selling prices elevated while scaling up sales to customers around the globe. This helped the company expand its operating margin from 0% to 17% in less than three years.
This profit margin was much greater than other mass-production automakers. Higher margins combined with strong revenue growth led to an explosion in profit generation for Tesla. It hit $12.6 billion in 2022 alone.
Now, its pricing power is moving in the wrong direction. Even though deliveries were up 36% year over year in Q1, the EV-maker took price cuts of 10%-15% across the board to get there. This means revenue growth is likely going to slow down to around 20% in Q1 (just an approximation).
That might not seem like the end of the world, but price cuts will have an even greater impact on bottom-line profitability, compared to revenue, especially right now when companies are trying to wrestle with high inflation. If Tesla's revenue grows 20% in 2023, compared to 2022, but its operating margin slips from 17% down to 10% or lower, it will see decreasing earnings this year. Lower costs could offset some margin decline, but we won't know that until the company reports earnings.
TSLA Net Income (TTM) data by YCharts.
Investors are paying a pretty penny for the stock right now
The scariest thing about Tesla's stock right now is its valuation. With the company's market cap of $610 billion, shares are trading at a trailing price-to-earnings ratio (P/E) of 48.4, based on its 2022 net income.
This is more than twice the average for the S&P 500 right now, even though there are flashing lights in the form of inventory builds and price cuts telling investors that Tesla's earnings are likely going to decline in 2023. Call me crazy, but this doesn't sound like a recipe for strong future stock returns.
NASDAQ: TSLA
Key Data Points
Of course, these might be temporary woes for a stock that has crushed the S&P 500 over the last 10 years. But considering the EV-maker's huge near-term woes and a valuation that's already pricing in years of future growth, I think it's best to keep Tesla stock on your watchlist right now, even if you're bullish on its long-term prospects.
