Job cuts

In mid-April, Tesla's (TSLA) employees received an email from CEO Elon Musk, informing them of staff reductions, citing the need to reduce expenses and increase productivity as part of the next phase of growth. This would be a more than 10 percent reduction in headcount, representing more than 14,000 workers. This will be a global measure, with their main markets - the US and China - expected to be particularly affected. This will be the third and largest redundancy in a row. It will cut staff by seven per cent in 2019 and 3.5 per cent in 2022. Multiple Reuters sources from both countries said the layoffs have already begun, with salespeople and technicians being the main targets. Tesla's German factory has denied local media reports that it has already laid off around 3,000 employees, but according to Reuters, as part of implementing Musk's demands, it will cut staff "only" by around 300 temporary workers. In addition to regular employees, Tesla's vice president of engineering Andrew Baglin and vice president of public policy Rohan Patel have also left.

The opposite is true

Usually, downsizing announcements lead to a surge in shares in anticipation of improvements and streamlining in the company's operations and especially profits. In Tesla's case, the opposite was true and according to CNBC, the stock lost 6 percent on the day of the announcement (April 15, 2024) and another 2.7 percent the following day. For comparison- during previous waves of layoffs, the stock gained 3 percent in 2019 and in 2022, although it fell, it eventually recovered.*

First drop in sales in 4 years

The current decline was preceded by a drop in value from early April following the announcement of sales for the first quarter of 2024, which saw a decline for the first time in 4 years. Unpleasantly surprised investors sold their shares, which fell in value by 5.5 percent.* Reported sales for the first quarter were at just under 387,000 vehicles sold, a 20-percent decline from the final quarter of last year and a year-over-year decline of 8.5 percent. Adding to the disappointing results is the fact that Tesla did not even come close to the levels that analysts had predicted. The lowest estimates were around 414,000 vehicles sold. The manufacturer's rationale was the Hussite attacks in the Red Sea, a fire at their German factory and the start of Model 3 production.

Both of the aforementioned April slumps only added to the already significant slump the company is currently experiencing. The manufacturer's stock has been in the red since the beginning of the year. They have plummeted 41 percent, reaching a price of $144 per share as of April 24. Still, they fall short of the lows of early 2023, when they were at $113 per share. Market capitalization has plunged to $460 billion, according to Coinmarketcap.com data. It peaked in early November 2021, when its value stood at $1.2 trillion.*

Tesla's stock performance over the past 5 years. (Source: GoogleFinance)*

China, expensive products and weakening demand

In addition to low sales and layoffs, there are other reasons that have an impact on the company's stock market value development. It is a combination of weakening demand, high prices and intensifying competition from Chinese producers. Chinese producers have an advantage over their American, but also European, competitors in the form of high government subsidies in the areas of sustainability and technological expertise, and can therefore also offer customers easier-to-use and, above all, cheaper vehicle variants. The biggest producer and competitor in the Chinese market at the moment is the manufacturer BYD, which according to CNN offers its models for between 10 thousand and 16 thousand USD, compared to Tesla, which, after cutting prices, still offers some models for more than 2 times the price.

The competition is not lagging behind

Another challenge is the introduction of cars from newcomers in the automotive market. For example, Huawei, which we know earlier with another line of products, recently introduced its first car that looks like a sports car from Porsche and is more powerful and, of course, cheaper than Tesla's Model 3. The more affordable electric cars are then reflected in sales. BYD or other companies such as XPeng, Li Auto or Nio have reported higher monthly and quarterly sales this year. Customers' expectations that they could see a cheap version of the car quickly disappeared. Reuters reported in early April that long-awaited plans to release a Model 2 SUV with a sub-$30,000 price tag had been scrapped. Instead, Elon Musk announced that he is focusing on the release of an autonomous vehicle, the so-called robotaxi, which should be in early August. While this announcement caused the stock to rise 5 percent*, it caught investors and customers who were expecting the Model 2 to be Tesla's gateway to mass production by surprise.

On a positive note

Despite the difficulties in the electric vehicle market, Morgan Stanley remains optimistic about Tesla's future. It highlights the manufacturer's potential to benefit from AI and recommends prioritising its core EV business alongside AI development. However, persistent low demand requires efficiency gains and adjustments that could lead to non-traditional partnerships, according to Morgan Stanley. For example, working with Chinese partners could expand the company's market reach.

Olivia Lacenova, principal analyst at Wonderinterest Trading Ltd.

* Past performance is no guarantee of future results.