Surprise, surprise, Tesla (TSLA) is in the news this morning! There have, to this point, been very few things about Elon Musk's electric car company been consistent, but newsworthiness is definitely one of them. This time the news in question is more along the lines of a conventional business story, and that is why, even though it has caused TSLA to open up this morning over seven percent lower than yesterday's close, over time that drop will prove to be an opportunity, not a warning.
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Sensational news is nothing new to Tesla. Product launches, production milestones, new projects, in fact almost anything that goes on there is made public, often via Musk's Twitter account. Not all of it, however, is one hundred percent grounded in fact. The best example of that was the tweet last year that got him in trouble with the SEC, saying that TSLA was being taken private and that funding for that deal was secured.
That was typical of the normal "non-news" news that has surrounded the company until now. We should have guessed at the time of the original post that the supposed agreed price of $420 was significant, and subsequent footage of Musk puffing on a joint while being interviewed has led to an obvious conclusion. Whether the tweet was cannabis-fueled or not, however, is not the point. That incident was yet another example of Musk saying something supportive of TSLA and the market reacting, a tendency that has made life very frustrating over the last few years for those who have shorted the stock.
Despite the vulnerability to a tweet or two, the reasons for doing that are pretty clear and compelling. Tesla has a range of spectacular products, continues to innovate, is committed to growth, and leads the world in the EV business that has such massive potential. It is an exciting venture in a lot of ways. So far though, as a business, it has not been a resounding success.
Notwithstanding last month's surprise profit, losses at Tesla have continued to pile up. Even more worrying was that those losses seemed to get bigger as sales increased. That suggests a lack of cost control that many understandably saw as worrying. To the "Tesleratis" though, that was a feature, not a bug. Musk was seen as committed to his vision of growth and as one of the few CEOs of a public company with the fortitude to stand up to the Wall Street bullies. Punishing a company for investing in its people and in growth was seen as just Wall Street sticking to its short-sighted, evil ways.
Therein lies the problem with TSLA as a stock for many traders and investors. All news is viewed through a filter of extreme optimism or pessimism. Something that the bears saw as evidence that the company was in serious trouble could be simultaneously perceived by the bulls as another reason to buy. This morning's news, for example, that the company is laying off around seven percent of its workforce and the warning from Musk that they face a "difficult" road ahead, is obviously bad. There is, however, a bull case to be made from it, and that may prove to be the right take over time.
Tesla has been growing rapidly since its inception, but this news is a sign that they may finally be not growing so much as growing up. Nobody wants to see over three thousand people lose their jobs but sometimes management teams have to act in the long-term interests of a company to protect the rest of the employees, present and future. That is what Tesla is doing here.
Cutting seven percent of the workforce sounds like a disastrous scenario for any company, but in the context of thirty percent job growth last year it is nowhere near as concerning. Sure, it indicates that the over-optimism that has been a hallmark of Tesla is still there, but it also shows a new commitment to realism. There is an understanding that substantial growth can only come from producing lower-priced vehicles, and that if they are to do that, costs have to be controlled.
It seems that Musk and his team, having demonstrated that they can stand up to Wall Street, now have the courage to listen to what those critics are saying. Growth is great, but sustainable growth depends on periods of profitability…just ask Jeff Bezos. Amazon (AMZN) focused on hyper-growth for years, but never lost control of costs and frequently demonstrated the ability to turn on the profit tap.
Obviously, TSLA had to drop following cutting back and what amounts to a profit warning for both Q4 results due in a couple of weeks and the current quarter. That move, however, will probably not be sustained as even the bears come to see that Tesla acting like any other car company, and adjusting employee numbers and expectations based on its prospects, is not a bad thing.