Tesla stocks tumble

Tesla stock falls as layoffs, profit comment ignite demand fears

Marketwatch,

18 January, 2019

News of layoffs and a likely smaller fourth-quarter profit stoked investor fears about growth and demand at Tesla Inc., bringing the company’s shares down 13% on Friday.

Tesla TSLA, -12.97% shares ended at $302.26 and traded as low as $299.73, the worst performer on the Nasdaq 100 NDX, +0.98% on Friday. Shares are down 12% in the past 12 months, compared with losses of around 4.5% for the S&P 500 index. SPX, +1.32% 

“We think Tesla probably increased its employee base by more than it needed to last year, and is laying off some of those workers to bring down costs," said Garrett Nelson, automotive analyst at CFRA Research.

“For most auto manufacturers, the cost-cutting would be received positively, but in Tesla’s case, investors start to second guess whether demand is the real issue,” Nelson said.

In a memo to employees reviewed by The Wall Street Journal and later posted on the company's website, Chief Executive Elon Musk said Tesla would post GAAP profits when it reports its fourth-quarter results, “but less than Q3.” Tesla has not yet set up a date for its quarterly earnings.

Read more: Tesla warns on Q4 profit, cuts jobs to pull down Model 3 price

Tesla needs to be able to offer cheaper Model 3, particularly when U.S. tax credits drop further midyear, Musk said. Tesla’s headcount, which grew “more than we can support” last year, will be reduced by about 7%, he said.

Despite the swift share reaction, most Wall Street sell-side analysts seemed to stick with their predictions for Tesla.

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“Tesla is entering a ‘fork in the road’ situation that will ultimately define the future of the company for years to come,” with production of mid-tier and base Model 3s ramping up as electric-vehicle tax credits roll off in the U.S., pressuring demand, Dan Ives at Wedbush said in a note Friday.

“The knee jerk reaction to this morning’s blog post will clearly be negative from the Street’s perspective as there will be more questions than answers until the company formally reports earnings/guidance in early February,” he said.

Nonetheless, Tesla is likely to emerge as a stronger, more profitable, and more geographically diversified company in the next 12 to 18 months, Ives said, keeping his rating on the stock at the equivalent of buy.

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Similarly, Canaccord Genuity’s Jed Dorsheimer said that when investors “take a step back and the dust settles, we believe these moves may be viewed as positives to align the business and set up for a more auspicious 2019.”

Canaccord kept its rating on Tesla at hold.

Shares are down as investors fret about Tesla’s growth trajectory, but the “workforce cut is not unreasonable as the company ramped hiring during the Model 3 production ramp and has now likely completed the labor-intensive portion,” Ben Kallo at Baird said in a note.

“We would be buyers on weakness following the announcement.”

Analysts at UBS said they had already thought the third quarter’s “high mix” was unlikely to be sustainable and would result in margin pressure for Tesla.

“With the federal tax credit being cut in half at the end of 2018, we see incremental demand pressure in Q1’19,” they said. Consensus estimates for the first quarter are around at $1.33 “and are likely inconsistent with ‘tiny profit,’” the UBS analysts, led by Colin Langan, said.

Also worryingly, the memo didn’t have “any color around future production targets” and the layoffs, the second in seven months, suggest “ongoing issues regarding labor planning and logistics,” the UBS analysts said.

“After ending 2018 with a Model 3 production run rate of <5k/week, despite indications for 10k/week initially and 7k/week more recently, we wonder if the company will ever be able to achieve a sustainable >5k/week Model 3 production value,” they said.