As the trailblazer in the industry, Tesla (TSLA -1.41%) has undoubtedly become the leader in the market for electric vehicles (EVs). According to Statista, the business commanded an impressive 52% of total unit sales in 2022 in the U.S., which represented a huge lead over the next best competitor.
This has translated to tremendous gains for shareholders. The stock is up a whopping 1,180% in the last five years, giving the company a market capitalization of $828 billion.
But it might not be all good news for the top EV company. Investors should be paying close attention to a potential red flag that has been brewing in recent quarters. Let's take a closer look at Tesla beneath the hood.
Production vs. Delivery
During the most recent three-month period (Q2 2023 ended June 30), Tesla reported revenue of $24.9 billion and adjusted diluted earnings per share of $0.91. Both figures exceeded Wall Street forecasts.
While these headline figures get a lot of the attention, shareholders should also keep in mind trends as they relate to Tesla's unit volumes. These are critical for an automotive manufacturer. In the quarter, the business produced 480,000 cars and delivered 466,000. This marks the fifth straight quarter that Tesla produced more cars than it delivered -- a potential red flag.
Consequently, global vehicle inventory, as measured by days of supply, has quadrupled year over year. As of June 30, Tesla had 16 days of supply, compared to just four days, 12 months ago.
The last thing shareholders want to see is a major imbalance between supply and demand, as this could result in management having to make unfavorable pricing decisions to get rid of excess inventory.
To be fair, we might already be seeing this play out right before our eyes. Tesla has cut the prices on its models multiple times just this year. The company's operating margin shrunk to 9.6% in Q2 from 14.6% in the second quarter last year. That's not the right direction in which to be heading.
In prior years, Tesla couldn't produce cars fast enough. In 2021, for example, it was normal to wait 10 months for a new Model 3 or Model X. Now, there's practically no delay, as vehicles can be shipped once the purchase transaction is complete. It looks like supply and demand might be normalizing.
Founder and CEO Elon Musk argues that the price reductions are to boost unit sales volumes, with the intention of growing market share. This perspective sounds good enough to assuage investor concerns. But it's hard not to believe that if demand were strong enough for these vehicles, prices wouldn't need to be cut multiple times.
What should investors do?
While I don't necessarily believe that production outpacing deliveries is a reason for shareholders to immediately dump their holdings, it's something to keep a close eye on as we look over the next few quarters. The bright side of this is that Tesla is still the undisputed leader in the EV industry, with margins that are still better than its mass-market rivals.
However, the last thing investors would want is for the brand image to take a hit due to oversupply hitting the market and ongoing price reductions. According to Interbrand, Tesla's brand is valued at $48 billion, good for third place among all automakers. Of the 15 car companies that made the list of the 100 top brands, Tesla's brand registered the fastest year-over-year growth in value.
It's hard to understate the brand's importance to the overall success of Tesla. As is the case with any consumer goods product, the business will have to keep finding ways to improve inventory management to maintain strong demand for its automobiles.
