Tesla shares took a big hit to end the week after CEO Elon Musk announced that the company would cut 7 percent of its workforce in order to cut costs as the company prepares to ramp up production and boost margins as they get closer to releasing the long-awaited $35,000 version of the Model 3.
Musk says Tesla faces "an extremely difficult challenge" in making their products a competitive alternative to traditional vehicles, adding that he expects Q4 profit to come in significantly lower than Q3.
Five experts weigh in on whether it's a challenge Musk and Tesla can overcome:
· Oppenheimer managing director Colin Rusch agrees with Jed Dorsheimer on Tesla's job cuts, but isn't bullish on what they'll accomplish. "This reduction in force should have been anticipated. This is very similar to what we saw on the front end of the Model S, where they had some aggressive hiring and additional staff to make the ramp successful. Today, we're seeing them pare back the headcount in the same way…" Rusch also says that even though there is a "real market of size" for the current iteration of the Model 3, it's not enough to keep Tesla growing. "For them to see the growth that's expected by the Street, they do need to get the price down to $35,000. I see that as an extraordinarily difficult thing for them to accomplish, I actually don't think they will accomplish that."
· Canaccord Genuity's Jed Dorsheimer thinks the workforce cut is just fine, calling it "clean-up" after the company's latest push to ramp up Model 3 production came with a wealth of new hires. "It's not a huge surprise to see this," Dorsheimer observes. "Obviously you never want to see a growth company cutting staff like this, but we're not overly concerned." Right now, he sees a scenario where Tesla's Q4 numbers could be great even with a lower-than-expected EPS result. "They cleared out a fair amount of inventory in the fourth quarter, so they cash flow number we think can surprise to the upside still, even with a lower EPS number. The other thing that we think they're going to end up doing is ramping up this factory in China, we think people are going to get bullish on that."
· "They're certainly in a better position than they were eight or nine months ago," says ROTH Capital's Craig Irwin. "Where we're going to see pressure on the stock today is the 'copy-paste' expectations of Q3 going through 2019 need to be reset…" But even though Tesla might be healthier now than at this point in 2018, the challenges in front of them are many. "We're early days in who's going to win this war in electric vehicles, and you've got a lot of new entrants coming in, and so it's tough to pick the winner right now."
· Needham's Raji Gil thinks that Tesla may have overestimated how many people can actually afford a high-end electric vehicle. "Clearly, in my mind, they have an issue with demand," says Rusch, " If you do the math… you have to conclude that 90 percent of the reservations that have been built up over the past couple of years are folks that wanted the standard battery version of the vehicle, which is $35,000." That version does not yet exist, and with the Federal EV tax credit being phased out, Rusch says time could be running out for Tesla to deliver their as-yet mythical car. "Once the credit starts to expire and we go into Q1 and Q2, and they cannot produce the cheaper version of the vehicle in time, do we see a pick-up in cancellations?"
· Westly Group founder Steve Westly loves where Elon Musk's company is right now, calling Tesla "the iPhone of electric vehicles," and saying they're well ahead of the game when it comes to a quickly-changing auto market. "Virtually every automaker in virtually every country in the world is moving all-electric, and Tesla's frankly in the pole position. They're winning," he says. "The challenge now is, after they've really won the high-end market in the U.S., how quickly can they go international? I think they're very well-positioned for that… and how quickly can they get to that mass market $35,000 vehicle with a 250-mile range? I think Tesla's going to win that race."