Electric vehicle (EV) leader Tesla (NASDAQ: TSLA) has continued to build on its industry lead recently — in just the past few months, it opened two new production facilities to grow its global reach.
But it appears that CEO Elon Musk is slamming on the brakes. In an internal email Thursday, Musk told his executive team to cut jobs and pause new hiring, according to a report by Reuters. With the stock still at an extremely high valuation based on traditional metrics, shareholders might want to look at Musk’s comments as a not-so-subtle warning.
Growing its lead
Tesla opened one of its new plants in Germany this March, marking a key expansion point. The company had been supplying the European market from its plant in Shanghai; now, each of those plants can focus on its own rich customer base. In its 2021 outlook, the International Energy Agency predicted China and Europe would continue to lead global EV sales through the rest of the decade.
And in April, Tesla began production from its new facility in Texas, its second in the U.S. Both new plants will help the company achieve its production growth plans for an approximately 50% annual increase over the next several years.
But Musk’s internal memo Thursday may have just clouded that goal.
The memo
In a note titled “pause all hiring worldwide,” Musk told his executive team to trim 10% of the company’s workforce and put a freeze on hiring, according to Reuters’ report. Tesla employed nearly 100,000 workers as of Dec. 31, 2021, so a 10% cut in the workforce is a significant number of jobs. The hiring freeze comes just as the two new factories should be ramping up production and needing to add workers. But Musk seems to feel that the economy is in for a rough road ahead, saying he has a “super bad feeling” about the outlook for the economy.
Smart investors should listen
One doesn’t need to read between the lines of Musk’s note. In addition to the new plants ramping up, Shanghai is just reopening after COVID-19 lockdowns stymied production for many EV makers in recent weeks. So Musk’s comments clearly indicate that those production delays didn’t put the company behind on delivering orders. Otherwise, the Shanghai plant would be looking to boost production in the near term rather than cut jobs.
For investors, the takeaway is that Tesla stock could see tough times ahead — at least for the short term. Tesla shares are already down more than 30% year to date. But they remain richly valued by traditional metrics. The stock’s price-to-earnings ratio remains around 100 based on earnings for the past 12 months. That implies investors see significant growth over the coming years. For a leader in a quickly growing industry, those growth expectations would seem to be reasonable, especially with the company itself saying it expects 50% volume growth for several years.
But the new developments could slam the brakes on that growth. If Musk’s prediction for a slowing economy pans out, the impact on Tesla’s share price could be meaningful. That shouldn’t bother long-term investors too much, but for those looking to start, or add, positions, there could be much better opportunities coming for Tesla shares at a lower price.
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