Tesla Sales Surge, But at What Cost?

Price cuts work — but only up to a point. Which is about all one can glean from Tesla Inc.’s latest quarterly sales numbers, announced Sunday. The struggle between growth and margins, which defined the first half of 2023, has yet to be resolved.

Having delivered about 466,000 vehicles, Tesla beat the consensus estimate by 4%. Deliveries so far this year are up 58% compared with the same period in 2022 and, at the current run rate, look on track to meet Tesla’s guidance of about 1.8 million this year (though more would be needed to hit the two million upside case Chief Executive Elon Musk has mentioned). For Tesla’s never-small fan club, this should be enough to support the stock on a thinly traded pre-July 4 Monday.

What we won’t know until July 19, however, is whether the goodies Tesla offered to entice buyers, including price cuts, inflicted more damage on profits. When Tesla reported first-quarter results back in April, the ding to gross margins from a very public price war unnerved investors enough to wipe $56 billion, or roughly 10%, from its market cap the next day. While Tesla’s margins fell from a relatively high level, the notion that Tesla might suffer the oldest of Detroit’s afflictions — taking a hit on profits to move product — was hard to reconcile with the company’s more cutting-edge narratives.

On that front, there is one unsettling element from Sunday’s numbers: Tesla is still producing more vehicles than it is selling. While the gap is narrowing, this marks the fifth quarter in a row of excess production, for a cumulative total of just over 91,000 undelivered vehicles. At a notional cost of about $38,000 each — the implied average production cost in the first quarter — that’s almost $3.5 billion of finished inventory, with about $520 million added in the second quarter.

That matters because a surge in inventory fueled the big jump in working capital that savaged Tesla’s free cash flow in the first quarter. While there is unlikely to be as significant an increase this quarter, the continuing build-up of unsold vehicles will keep a lid on margins and cash flow. It also conflicts with the long-standing idea that Tesla is supply-constrained, which is doubly important given how much new manufacturing capacity is coming online.

Mitigating that to some degree is the fact that sales of higher-priced Model S and X vehicles bounced back to their highest level since late 2019, a big recovery from a dismal first quarter. On the other hand, these were the subject of some of Tesla’s biggest incentives, offering discounts of $7,500 plus free charging to clear inventory. Again, the headline growth figure leaves the question of margins still hanging.

While all carmakers toggle pricing in order to strike a balance between growth and profits, Tesla’s $830 billion market capitalization demands high numbers on both counts. Since the last, poorly received set of financial results, Tesla’s market cap has nonetheless risen by $259 billion; or, as I like to think of it, slightly more than one Toyota Motor Corp.

Quite what has fueled such enthusiasm is, as ever, a bit mysterious. Some cocktail of Tesla striking charging deals with rival manufacturers, a broad market rally and surging enthusiasm for anything AI-related — which rubs off on Tesla because of its touts of as yet elusive autonomous vehicles — probably explains it. The question now is whether, later this month, the actual profits offer any kind of support.