Tesla’s stock experienced a 6.9 percent increase on Monday, propelled by better-than-expected second-quarter delivery and production figures.
Analysts had anticipated 445,925 deliveries to be made by Tesla for the period ending June 30, 2023. However, the company delivered 466,140 vehicles during the second quarter of 2023.
The strong delivery numbers were driven by incentives and discounts offered to buyers throughout the first half of the year, along with a $7,500 federal tax credit under the Inflation Reduction Act in the U.S.
Tesla’s shares have witnessed an impressive 127 percent year-to-date increase. This substantial growth comes after a challenging performance in 2022, which led the shares toward record lows.
Although the stock is still far from its peak during the pandemic, reaching above $407 in November 2021, it recovered from its lowest point in December 2022, when it reached $101.81.
Fluctuations in Tesla’s stock price influenced the stock market. The Dow Jones Industrial Average rose by 10.87 points, or 0.03 percent, to finish at 34,418.47. Meanwhile, the S&P 500 increased by 0.12 percent and closed at 4,455.59. The Nasdaq Composite advanced by 0.21 percent to reach 13,816.77 in Monday’s truncated session.
The resilience of the U.S. economy, even amid continuous interest rate hikes, boosted investor confidence on Wall Street regarding the long-anticipated downturn.
The Tech sector accounted for roughly 62% of the S&P’s first-half gain.
— Bespoke (@bespokeinvest) July 1, 2023
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Cost of Tesla’s strong sales
Tesla’s sales surge raises questions about possible costs. Bloomberg wrote that Tesla’s incentives and price cuts’ impact on its profits will only become clear on July 19. During the first quarter, Tesla’s gross margins suffered due to a well-publicized price war, leading to investor apprehension and a substantial decrease in its market capitalization.
This development cast doubt on whether Tesla would sacrifice profitability to boost sales, contradicting the company’s innovation reputation.
According to Bloomberg, the recent sales figures highlight a concerning aspect — Tesla is producing more vehicles than it sells. This pattern has persisted for five consecutive quarters, leading to over 91,000 undelivered vehicles.
An estimated production cost of around $38,000 per vehicle translates to an inventory value of $3.5 billion. An additional $520 million worth of vehicles were added to the inventory in the second quarter alone.
The inventory accumulation changed Tesla’s working capital and affected its free cash flow in the first quarter. Although the increase in inventory is expected to be less significant this quarter, the ongoing buildup of unsold vehicles will limit profit margins and cash flow.
This continuing buildup also contradicts the long-standing notion that Tesla faced supply constraints, which supposedly led to substantial expansion of its manufacturing capacity.
Partially offsetting this situation is the notable rebound in sales of the higher-priced Model S and X vehicles, reaching their highest level since late 2019. This development marks a significant recovery from the disappointing performance in the first quarter.
However, it is worth noting that these vehicles were also the focus of substantial incentives from Tesla, including discounts of $7,500 and complimentary charging to clear inventory. Therefore, while the growth in sales is encouraging, the impact on profit margins remains uncertain.