How Tesla’s Profitability and Inventory Are Affected by Management Decisions
In the August 2023 edition of Finance 'In-Action,' we’ll look at how management decisions (strategy) affected Tesla’s profitability and inventory turnover.
Tesla sinks as Musk warns of more blows to profitability. Why Tesla’s EV charging plugs are becoming industry standard.
“…Musk said Tesla will have to keep lowering the prices of its electric vehicles if interest rates continue to rise… markdowns have already taken a toll on automotive gross margins”. The markdowns or discounts on sales reduce gross profits, which lowers gross margins (gross profit ÷ revenue).
“We also expect earnings pressure from higher opex [operating expenditures] as TSLA accelerates investment in AI and other growth endeavours.” These increases in operating expenses reduce operating profit and further erode profitability.
“Adding to Tesla’s challenges is its growing inventory of cars…it now has 16 days’ worth of supply…up from 15 days last quarter…”. Tesla’s inventory turnover has increased; more time is needed to sell cars.
“Ford Motor and General Motors announced that electric vehicles they built in the future…would use Tesla’s charging gear…Rivian, Volvo and Mercedes-Benz quickly followed”.
Lower prices typically lead to increased sales volume (number of units), increasing market share. This move can also be seen as an offensive strategy to ensure Tesla’s dominance (relevance) in the EV market, as an increasing number of automakers will have access to and use Tesla’s once proprietary charging network and charging standard.
Tesla Sinks as Musk Warns of More Blows to Profitability, Bloomberg, July 21, 2023 and Why Tesla’s EV Charging Plugs Are Becoming Industry Standard, Bloomberg, July 23, 2023..
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