Tesla shares are near the lowest levels since last spring, after the electric vehicle group announced its largest-ever job cuts, causing analysts and investors to question the longer-term growth story of one of the stock market's most popular stocks.
Tesla (TSLA) unveiled the layoffs in a companywide memo penned by CEO Elon Musk, who told employees it was time to "streamline the company for the next phase of growth."
"As we prepare the company for our next phase of growth, it is extremely important to look at every aspect of the company for cost reductions and increasing productivity," Musk said. "As part of this effort, we have done a thorough review of the organization and made the difficult decision to reduce our headcount by more than 10% globally."
The cull, likely to total around 14,000 employees, also included two key executives: Drew Baglino, who headed Tesla's battery division, and Rohan Patel, vice president for public policy.
Tesla shares have been in an extended drawdown since the company posted a weaker-than-expected first-quarter profit update in early February that included narrowing profit margins and a warning that full-year delivery totals would be "notably lower" than in 2023.
Deliveries have also disappointed investors, with the group handing over 387,000 new cars to customers during the three months ended in March. That was a 20% decline from the record 484,000 it notched over the final months of last year and the biggest miss to estimates since Wall Street began compiling data in the mid-2010s.
Weaker-than-expected sales figures from China, where last month's volumes fell to the lowest levels in more than a year, are also adding pressure to the market's aggressive full-year delivery targets for Tesla.
Musk's 'fork-in-the-road' moment
Tesla said the volume declines were tied to "the production ramp of the updated Model 3 at our Fremont factory and factory shutdowns resulting from shipping diversions caused by the Red Sea conflict and an arson attack at Gigafactory Berlin."
The group was also left with a bloated inventory base of around 160,000 vehicles, according to some estimates, which along with lower leasing rates will add further pressure to Tesla's profit margins over the coming quarters.
Many investors, including those who have long-supported Musk's tenure at the helm of the group, have suggested the slump reflects a deeper and more worrying decline in overall EV demand.
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"This is a fork-in-the-road time for Musk to get Tesla through this turbulent period. Otherwise dark days could be ahead," said Wedbush analyst Dan Ives, who still carries an outperform rating and $300 price target on Tesla stock.
"With the ongoing debacle around margins and demand, Musk will need to quickly take the reins back in to regain confidence in the eyes of the Street," he added.
It's not the supply, it's the demand: JP Morgan
JP Morgan analyst Ryan Brinkman argued in a note published Tuesday that the new Tesla job cuts, which reportedly include reductions in both the U.S. and China, "should now leave no doubt that the decline in deliveries has been a function of lower demand and not supply."
Brinkman, who carries an underweight rating with a $115 price target on the stock, said Tesla's retrenchment has "far-reaching implications for the hypergrowth narrative still embedded in Tesla's share price, suggesting material downside risk for the stock."
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Tesla will report detailed first-quarter earnings after the close of trading on April 23. Analysts are looking for a bottom line of around 53 cents a share for the three months ended in March, down more than a third from 85 cents a share over the year-earlier period, on revenue of around $22.6 billion.
Tesla's profit margins, probably the most closely tracked metric by analysts on Wall Street, are likely to narrow to around 17.2%, with estimates ranging between 14.7% and 20%, according to LSEG forecasts.
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Wall Street "wants and needs answers next week on Tesla's 1Q conference call as the string of bad news over the last few months has been a horror show for investors in the Tesla story," Ives said.
"We need to hear the rationale for the cost cutting, the strategy going forward, product roadmap, and an overall vision from Musk. Otherwise many investors might head for the elevators during this Category 5 perfect storm of weak demand Tesla is seeing globally in 2024," he added.
Tesla shares were marked 3% lower in early Tuesday trading to change hands at $156.57 each, the lowest since May of last year and a move that would extend the stock's year-to-date decline to around 37.4%.
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