No matter how well or poorly the stock market performs, people will always gravitate to the next-big-thing investment. Arguably, none has caught the attention of investors more for the past couple of years than electric vehicles (EVs).
Growth estimates for EVs vary wildly and will be largely dependent on the infrastructure needed to support broad-scale EV adoption. According to a report from Beyond Market Insights, global EV sales are expected to catapult from $179 billion in 2021 to about $1.11 trillion by 2030. That's a compound annual growth rate of 22.5% for those of you keeping score at home.
However, EV growth and adoption isn't going to be linear. There are going to be hiccups and speed bumps that challenge some of the industry's most notable players. At the moment, rising inventory levels for two ultra-popular EV stocks are sounding an ominous warning for Wall Street and investors.
A Tesla Model S charging. Image source: Tesla.
Price cuts may be nothing more than a Band-Aid for Tesla
The first electric-vehicle stock contending with inventory troubles is none other than the largest automaker by market cap worldwide, Tesla (TSLA -0.29%).
Earlier this month, Tesla reported production of nearly 441,000 EVs (mostly Model 3 and Model Y), along with nearly 423,000 deliveries for the first quarter (Q1). Though its Q1 production puts it on track for about 1.7 million EVs on an annualized run-rate basis, the continued ramp up of its German and Texas gigafactories should allow the company to reach its targeted 1.8 million output in 2023.
But producing EVs is only half the battle. There have to be buyers for this production ramp up to make sense. Over the trailing-12-month period, Tesla has produced 78,334 more cars than it's delivered:
- 3,885 more cars produced than delivered in Q2 2022
- 22,093 in Q3 2022
- 34,423 in Q4 2022
- 17,933 in Q1 2023
According to Tesla, its excess supply accounted for 15 days' worth of sales in Q1, which represents the highest level of inventory build, relative to the company's sales pace, since the third quarter of 2020. Although Tesla has suggested this increase in inventory is the result of more cars in transit, the company's price-cut activity suggests otherwise.
Since the beginning of 2023, Tesla has reduced prices on select U.S. models five separate times. Some global price reductions have totaled more than 20% from where they stood toward the end of 2022. While independent analysis has revealed very modest dips in inventory associated with these first- and second-quarter price reductions, additional price cuts may be necessary.
There are two big dilemmas for Tesla that go well beyond its recent price changes. First of all, the Federal Reserve is now modeling a mild recession for later this year. While Tesla has more-than-enough cash on hand to navigate a recession, auto sales are cyclical. In other words, consumers and businesses would be expected to purchase fewer EVs for as long as the economic outlook remains uncertain. This would seem to conflict with Tesla's ambitions to expand production to 1.8 million EVs in 2023.
The other clear-cut issue for Tesla is that it's just a car company. While CEO Elon Musk has overseen Tesla's foray into solar-panel installation, storage systems, its supercharger network, and even robotics, the company's income statements conclusively show that these ancillary operations are low-margin segments that lose money once below-the-line expenses are accounted for.
Tesla generates an organic profit (excluding renewable energy credits) one way -- and only one way at the moment: by selling and leasing EVs. Auto stocks are traditionally valued at a multiple of six to eight times Wall Street's forecast earnings. Tesla is commanding a nosebleed multiple of 48 times Wall Street's forecast earnings for 2023. This looks completely unsustainable given Tesla's rising inventory levels.
The Lucid Air is expected to be a major player in the premium EV sedan market. Image source: Lucid.
Lucid's ultra-premium sedans are gathering dust
Inventory issues are also cropping up for premium electric-vehicle manufacturer Lucid Group (LCID -3.70%).
Last week, Lucid announced that its Arizona manufacturing facility had produced 2,314 EVs during the first quarter. This level of production places the company a little shy (on an annual run-rate basis) of the 10,000 to 14,000 EVs it announced as its target production rate for 2023 back in February.
But it's not Lucid's tepid production growth that should be raising eyebrows -- it's the company's deliveries. The first quarter saw just 1,406 EVs reach buyers. In 2022, the company produced 7,180 EVs, with only 4,369 being delivered. Since 2022 began, Lucid has produced 3,719 more EVs than it's delivered.
While that's a considerably smaller nominal inventory build than Tesla's 78,000-plus vehicles, it's a terrifyingly large number for a company that only delivered 1,406 EVs in the first quarter. Instead of excess supply accounting for 15 days' worth of sales in Tesla's case, Lucid is sitting on about eight months' worth of inventory, based on Q1 sales.
The advantage of the Lucid Air was supposed to be its price point. Focusing on a high-earning consumer and having Tesla predominantly abandon the high-end category by focusing on lower-cost mass production with the Model 3 should have rolled out the red carpet for Lucid. Instead, premium EV buyers appear more reluctant than ever to take the plunge.
Another concern is that Lucid could lean on supply chain issues tied to the COVID-19 pandemic as a reason for falling short of its production targets in 2022. However, with most countries abandoning their stringent COVID-19 mitigation strategies, Lucid's management team will no longer be able to mask weak demand for its high-end EVs.
Making things worse for Lucid is the fact that it's not profitable. While Tesla has generated three consecutive years of generally accepted accounting principles (GAAP) profit, Lucid isn't anywhere near profitability. In fact, if Wall Street's consensus earnings forecasts are correct, Lucid could lose more than $2.8 billion in 2023 and another $2.2 billion next year. The company ended 2022 with $4.9 billion in total liquidity, which is only expected to fund operations through March 31, 2024.
While a sizable number of reservations have been the dangling carrot to attract investors to Lucid Group, the proof in the pudding (i.e., production and delivery data) offers an ominous warning about the company's future.
