- Revenues increase faster than inventory.
- Finished goods represent a small amount of revenues.
- Customers pay cash, accounts receivable stay small.
- No, Tesla doesn’t have an inventory problem, quite the contrary.
Rumors about Tesla's (NASDAQ:TSLA) inventory problems come and go every quarter, but the odds are Tesla provides a detailed view of its inventory quarter over quarter, which I'm going to analyze to make my point against such rumors.
There are three facts, which demonstrate Tesla doesn't have an inventory problem. Actually, Tesla has a good inventory management with more raw materials than finished goods, as well as very low inventory write-offs. It is also easier for the company to manage its inventory thanks to the fact that their cars are production constrained and attractive to the customers. Now, let's point out the inventory facts.
Fact #1: Revenues increase faster than inventory
Tesla's revenues have substantially increased, from $400 million in 2012 to $2 billion in 2013. And the story is going to repeat in the following years. In fact, analysts expect revenues of $3.7 billion and $5.3 billion for the years 2014 and 2015.
In my opinion, revenues will increase in the following years as analysts predict, because the market for electric cars is at a growing stage, far from traditional car markets, which are already mature in the US and Europe. On the contrary, demand for electric cars is expected to stay strong in western countries. Afterwards, don't forget to point out China's potential market. I wouldn't underestimate China's electric cars demand for the future, as Elon Musk said:
"It could be as big as the U.S. market, maybe bigger. Even without building there locally, it's always going to be the second-biggest market after the U.S."
For the last five quarters (see table below), the growth rate of revenues stands for at 19%, while the inventory growth rate comes at 6%. For Q4 2013, revenues are up by 42% and inventory is down by 2%. This table demonstrates the fact that Tesla can sell its cars very quickly in the market. Customer's demand for Tesla's electric cars is huge, cars don't stick in the factory waiting for a customer, as it is the case with certain cars companies. This is why revenues grow faster than inventory.
If you are not yet convinced about the fact that the company doesn't have an inventory problem, let's go on with Fact #2, which goes a little bit deeper in the inventory details.
Fact #2: Low finished goods, high raw materials
If you look at the inventory details, you can notice that finished goods increase at a growth rate of 2.6% for the last five quarters, while raw materials increase by 3%. Specifically, Q4 2013 % change is very interesting. In fact, raw materials go up by 12.3% and finished goods go down by 32.3%, which proves the fact that Tesla sells its car very quickly. Moreover, the company expects higher demand in the future as evidenced by raw materials, which have increased the three last quarters from $99.7 million to $184.6 million.
As you can see in the graph, raw materials bottomed in Q2 2013. Since then, Tesla almost doubles it at $184.6 million, while finished goods stay approximately at the same level, from $77.8 million to $69.3 million.
Regarding the finished goods, you can see that they are very low in comparison with total revenues, which shows that Tesla is production constrained at the moment. Remember that the company has planned to build a gigafactory to expand its production capacity, so I wouldn't be surprised if that number goes up heavily in the future, but remains at the same level as a % of total revenues.
Fact #3: Accounts receivable as a % of total revenues stay low
When you have an attractive product such as Tesla's cars, you can sell it straight forward to the market, without asking for deferred payment, which comes directly in accounts receivable. In Tesla's case, accounts receivable represent less than 8% of total revenues for the last quarter, which is relatively small and points out the capacity of Tesla to receive payment from customers without delays.
Tesla doesn't have an inventory problem as shown by these three facts. Maybe Tesla is risky and overvalued at the moment given the risks raised by its gigafactory, increasing competition from other manufacturers in electric cars and high expectations of future growth. But, the company can continue its stock market success story based on the facts I pointed out.
While Tesla can continue to attract more customers by delivering attractive products and manage its inventory of raw materials and finished goods as well as today, I won't advise to try to short the stock. If you want to short, you have to look at the inventory management first and here, Tesla is doing a great job quarter over quarter. So Tesla is certainly not a short opportunity at the moment.
In Tesla's case, I will take a wait and see approach until something interesting happens, which could permanently affect the company in a negative or positive way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may initiate a short or long position at any time.