Tesla Shares Fall on Hiring Freeze and Job Cuts

On June 3, Reuters reported that Tesla (TSLA) CEO Elon Musk plans to pause all hiring and cut roughly 10% of jobs across the company due to management’s outlook for an economic downturn. In 2021, Tesla hired over 28,500 employees, which grew the workforce over 40% during the year. Further, the company has likely hired more employees during the first five months of 2022 as Tesla opened two new production facilities and continues to grow its artificial intelligence division. In our view, Tesla likely does not need to hire any more employees to maintain its growth, and we think the plan to reduce the workforce likely shows that Tesla overhired last year.

Tesla has shown the ability to scale. For example, revenue grew over 80% year on year during the first quarter, while selling, general, and administrative expenses fell over 6% during the same time period. As such, we see no reason to change our outlook for the company. We maintain our $750 per-share fair value estimate and narrow moat rating.

Tesla shares were down nearly 7% at the time of writing on the news. However, at current prices, we view shares as fairly valued with the stock trading slightly below our fair value estimate. As a result, we recommend investors wait for a larger margin of safety before considering an entry position.

We view 2022 as a transition year for Tesla. While we continue to expect vehicle delivery volumes to grow over 60% year on year, we see near-term cost headwinds that will likely weigh on companywide profits. We think the coronavirus-related lockdowns will likely result in lower second-quarter production and increase costs. Additionally, the startup of the two new factories, one in Austin, Texas, and one in Berlin, Germany, will likely weigh on profitability as production will ramp over time. However, over the next several years, we expect Tesla’s profit margins to expand as the company drives down unit cost per vehicle.