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Stock Analyst Update

Growing Pains at Tesla With Layoffs

Elon Musk's plan to slim the workforce to drive down the price of the Model 3 is sensible, and our fair value estimate is unchanged.

Mentioned:

We are not changing our fair value estimate after  Tesla (TSLA) announced a 7% head count reduction and CEO Elon Musk said in an employee memo filed as an 8-K that fourth-quarter profit is lower than the third quarter's and the first quarter will have a tiny profit "with great difficulty, effort, and some luck." Musk said the firm increased full-time head count by 30% in 2018 and cannot support that. It also can keep only the most critical contracted employees. Musk is right to say in the memo that Tesla's products are "still too expensive for most people."

We've long thought that for Tesla to grow to justify a valuation recently higher than nearly every other automaker, it needs more scale, and Musk seems to share that view. He wants to bring sustainable electric transport to everyone, and that cannot be done with a Model 3 starting before U.S. federal tax credits at $44,000, Model S starting at $94,000, and Model X starting at $97,000. New products coming are the Model Y crossover, a new roadster starting at $200,000, a semi, a pickup truck, and likely a compact car. Tesla needs time to make these vehicles, and that means keeping the company viable. Musk in the 8-K stressed that the U.S. tax credit being halved again on July 1 to $1,875 increases the need for lower-priced Model 3s, and Tesla cannot get the scale to make the long-awaited $35,000 Model 3 without job cuts.

Despite the massive media attention on Tesla and its large market capitalization, we think it's important to remember that the company is still quite young and will have more growing pains and competition. If it can stay viable, we think it can enjoy strong momentum with the Model 3 for a while because the vehicle is just now being sold in foreign markets and the entry-level version is not available anywhere.

Tesla announced earlier that it delivered 245,240 vehicles in 2018, with 145,846 of them Model 3s. For 2019, we model 450,000 total deliveries, still far below Mercedes' 2.3 million in 2018.

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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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