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Investors punished Tesla on Friday after embattled CEO Elon Musk announced thousands of layoffs and admitted the company's electric cars are overpriced, sending the stock down 13 percent to $302 by the end of the trading day.
“While we have made great progress, our products are still too expensive for most people,” Tesla’s 47-year-old CEO said in a letter delivered to the automaker’s workforce early on Friday. In it, he warned that “the road ahead is very difficult,” and critical steps must be taken to assure Tesla’s continued viability.
It's a remarkable comedown for the high-flying stock whose company has suffered both from production struggles and the erratic behavior of its CEO. In September, Musk was forced to step down as chairman by the SEC and pay a $20 million fine for misleading investors in a tweet that he'd secured funding for a buyout of the company.
But for those looking at a half-full glass, the good news is that Tesla will likely remain in the black when it issues its fourth-quarter financial results in a few weeks, the second quarter in a row it will have delivered a profit. But earnings will clearly be down, signaled CEO Elon Musk as he announced plans to trim Tesla’s workforce by 10 percent.
The news from Tesla is bringing out both optimists and pessimists as the week comes to an end, reflecting a mix of good and bad news for the country’s largest manufacturer of battery-electric vehicles. Nowhere is that more obvious than on Wall Street, where Tesla shares have tumbled sharply, even as analysts hail the news of job cuts as a sign the analyst is getting a grip on margins.
There are plenty of facts for both bulls and bears. On the positive side:
- Tesla delivered an unexpectedly strong profit during the third quarter of 2018, only the third time it had gone into the black since going public in June 2010;
- The “production hell” it experienced during the first half of last year has been resolved, Tesla now churning out over 6,000 vehicles a week;
- Sales, meanwhile, totaled 245,000 for the year, nearly equal to Tesla’s total combined volume before that.
But there are also a number of reasons for concern:
- Last year’s sales were still barely half of the 500,000 target Musk had set prior to the July 2017 launch of the Model 3;
- Where there were once long lines waiting for one of those new sedans, customers barely had to wait at the end of the year, leading some analysts to question whether demand is slowing;
- Tesla itself appears to be concerned about maintaining momentum, the automaker beginning the year with a $2,000 price cut.
That move reflects the fact that the company late last year crossed the 200,000-unit threshold set by the federal government for tax incentives aimed at promoting the sales of zero-emissions vehicles. As of January 1st, buyers have seen the original, $7,500 tax credits offered on products like the Model 3 and older Models S and X reduced by half. They will be sliced again, come July 1, to just $1,875, then phase out entirely come January 1, 2020.
Other carmakers will begin to see their incentives phase out in the coming year, starting with General Motors, maker of the long-range Chevrolet Bolt EV, in April. Nissan, whose Leaf model was long the market’s leading battery-car, will follow later in the year.
While Tesla is already facing a rush of new competition, “only one nameplate currently sells more than 10,000 vehicles a month,” noted Jim Lentz, the CEO of Toyota North America, referring to the Model 3. But Toyota also plans to challenge the BEV king-of-the-hill when it opens up a new plant in Alabama in two years. Part of a joint venture with Mazda, it will produce new long-range electric cars.
Tesla’s Musk clearly acknowledged the need to kick sales of the Model 3 into high gear in his letter to employees. Part of the problem is that Tesla has yet to deliver the long-promised base, $35,000 version of that compact sedan.
“Starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles,” Musk wrote.
The job cuts announced on Friday are consistent with the need to drive down costs, even as production continues to grow at Tesla’s Fremont, California, assembly line, according to many of the analysts who follow the automaker.
“Reducing headcount also suggests productivity gains,” Jefferies analyst Philippe Houchois wrote to investors. “This is, in our view, consistent with slower growth rates but mostly the scope to improve productivity and flow that we identified during our visit to the Fremont plant mid November 2018.”
The job cuts at Tesla follow by less than a week an even more aggressive reduction-in-force at Musk’s other big enterprise, the South African-born entrepreneur announcing plans to eliminate 10% of SpaceX’s workforce.