Analysts Read Into Tesla Layoffs As Investors Pull Back

Tesla Inc (NASDAQ: TSLA)’s plan to bolster Model 3 margins and support sales of $35,000 versions doesn’t seem to sit well with investors.

The stock was trading down nearly 11 percent at the time of publication Friday after the automaker announced thousands of layoffs. 

Analysts Unsurprised 

Street experts reacted with more enthusiasm and less surprise. CNBC’s Phil LeBeau said growing pains had been expected given Tesla's production and cost-saving targets, and Oppenheimer analyst Colin Rusch agreed.

“They added an awful lot of staff to get these [ramp] numbers ... so to see them cutting the staff isn’t a surprise in our view,” Rusch said on CNBC. “You never want to see a growth company cutting staff like this, but we’re not overly concerned.”

Tesla has a history of extreme workforce adjustment, and today’s cut seems to fit within the larger strategy, Loup Ventures' Gene Munster said in a note. 

“Note that Tesla increased headcount by 30 percent last year to ramp Model 3 production,” Munster said. “Realized manufacturing efficiencies will allow the company to reduce headcount while increasing output.”

A New Focus

The layoffs follow a 10-percent workforce reduction in sister company SpaceX, and the coupled reports indicate CEO Elon Musk has a fresh focus on profitability, Munster said.

Last quarter, the average Model 3 sold for $55,000, and such higher-priced models ensured a small GAAP profit. Yet Tesla can only expand its share of the auto market through more affordable models, and realizing profits on those sales requires more efficient and lower-cost production. Layoffs serve this end.

A Sign Of Productivity

Oppenheimer's Rusch called the reduction both a proactive move to cut costs and a clean-up effort for the Model 3 rollout. Jefferies views it as a positive growth indicator.

"Reducing headcount also suggests productivity gains," analyst Philippe Houchois said in a note. "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."

A Head Start In EV

According to Loup, the electric vehicle market will grow only with a sub-$40,000 model — a product not yet offered by any automaker. With Tesla’s early rollout and no competition, the firm can seize control of the low-price consumer segment. 

Munster expects Tesla to take 20 percent of the U.S. EV market over the next decade and to grow its global unit sales by 25 percent annually.

Success Indicators

Following the layoffs, some will watch for progress on specific vehicle parts.

“It all comes down to battery costs,” CNBC's LeBeau said. “They are the leader in the industry, but they still need to bring it down even further, and that means bringing down the overall cost of production.”

Rusch’s focus is sales volume.

“What we think is the real point of debate for investors right now is whether the company is going to be able to sell 250,000 of these Model 3s every year or something more like 400,000 to 500,000, and I think they’re being proactive here to get toward that 400,000 to 500,000 number." 

The analyst expects to see the first $35,000 sales in the late third or fourth quarter.

Related Links:

Jefferies: 5 Factors Protecting Tesla Model 3 Margins

Tesla Meets Its Model 3 Production Goal, But Analysts Remain Largely Bearish

Photo courtesy of Tesla.