Tesla shares extended their declines on Tuesday, bringing them closer to the lowest levels since last spring, following the group's biggest-ever job cuts, which have analysts and investors questioning the company's long-term growth story. of the most popular stocks on the market.
The Austin Electric Vehicle Group (TSLA) unveiled the layoffs in a company-wide memo written by CEO Elon Musk, who told employees it was time to “rationalize the company for the next phase of growth.”
“As we prepare the company for our next phase of growth, it is extremely important to examine all aspects of the company to reduce costs and increase productivity,” Musk said. “As part of this effort, we have conducted a comprehensive review of the organization and made the difficult decision to reduce our workforce by more than 10% globally.”
The selection, which will likely total around 14,000 employees, also included two key executives: Drew Baglino, who led Tesla's battery division, and Rohan Patel, vice president of public policy.
Tesla shares have been on a prolonged slide since the company released a weaker-than-expected first-quarter earnings update in early February. The report included a reduction in profit margins and a warning that full-year delivery totals would be “noticeably lower” than in 2023.
Deliveries also disappointed investors: the group delivered more than 387,000 new cars to customers during the three months ended March. That's a 20% decline from the record 484,000 recorded in the final months of last year and the biggest miss on estimates since Wall Street began collecting data in the mid-2010s.
Weaker-than-expected sales figures from China, where volumes last month fell to the lowest levels in more than a year, are also increasing pressure on Tesla's aggressive full-year market delivery targets.
The moment of Musk's 'fork'
Tesla said the volume declines were related to “the production ramp of the updated Model 3 at our Fremont factory and factory closures resulting from shipment diversions caused by the Red Sea conflict and an arson attack in the Berlin Gigafactory”.
The group was also left with a bloated inventory base of around 160,000 vehicles, according to some estimates, which, along with lower lease rates, will add further pressure to Tesla's profit margins in the coming quarters.
Many investors, including those who have long supported Musk's tenure at the helm of the group, have suggested that the drop reflects a deeper and worrying decline in overall demand for electric vehicles.
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“This is a fork in the road for Musk to get Tesla out of this turbulent period. Otherwise, dark days could be ahead,” said Wedbush analyst Dan Ives, who still maintains an outperform rating and price target. of $300 for Tesla shares.
“With the current debacle around margins and demand, Musk will need to quickly take the reins to regain trust with (Wall) Street,” he added.
It's not supply, it's demand: JP Morgan
JP Morgan analyst Ryan Brinkman argued in a note published Tuesday that the new job cuts at Tesla, which reportedly include reductions in both the U.S. and China, “should now leave no doubt that the decline in deliveries have been a function of lower demand and not supply.” “.
Brinkman, who has an underweight rating with a $115 price target on the stock, said Tesla's downgrade has “far-reaching implications for the hypergrowth narrative that is still embedded in Tesla's stock price, which which suggests a material downside risk to the stock.”
Related: Elon Musk's biggest fans downplay news of Tesla's biggest layoff
Tesla will report detailed first-quarter earnings after the close of business on April 23. Analysts expect a bottom line of about 53 cents per share for the three months ended in March, down more than a third from 85 cents per share during the previous period. period of the previous year, with revenues of about $22.6 billion.
Tesla's profit margins, probably the most closely followed metric by Wall Street analysts, are likely to decline to around 17.2%, with estimates ranging from 14.7% to 20%, according to forecasts of LSEG.
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Wall Street “wants and needs answers next week on Tesla's first-quarter conference call, as the string of bad news over the past few months has been a horror show for investors in Tesla's history,” Ives said.
“We need to hear the rationale for the cost reduction, the strategy going forward, the product roadmap and an overview from Musk. Otherwise, many investors could head for the elevators during this Category 5 perfect storm of weak demand that Tesla is seeing globally in 2024.” he added.
Tesla shares fell 2.7% in premarket trading, indicating an opening price of $157.15. This is the lowest level since May last year and a move that would extend the stock's decline so far this year to around 37%.
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