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Stocks  | January 21, 2019

One of the biggest losers so far on Friday has been electric vehicle giant Tesla (TSLA). The company came out with a surprise announcement that it was cutting 7% of its workforce, as competition arrives and the name faces some headwinds. Just as Tesla was supposedly turning a corner, this negative news makes the future look a bit more cloudy.

After the company's large Q3 profit, the bulls were hoping that things would further improve in Q4, and this was the path to sustainable profitability. However, today's blog post details that Q4's profit will be smaller than Q3, and that a profit in Q1 2019 needs luck and effort and will be very difficult. Strangely enough, it was just two quarters or so ago when Tesla announced another large round of layoffs that Elon Musk said the following:

I also want to emphasize that we are making this hard decision now so that we never have to do this again.

I guess we can add that statement to the company's long list of failures. Perhaps, however, this news shouldn't have been a surprise. Just in the past week or so, Tesla announced it was eliminating its referral program as well as eliminating the cheapest and lowest margin versions of its Model S and X vehicles. When you look to pinch pennies, eventually job cuts must come. It's also interesting to note that Elon Musk did not repeat his famous line in this blog post that Tesla and Ford (F) are the only two US automakers to not go bankrupt.

If you are a Tesla customer, this news must be a huge slap in the face. Elon Musk has made several huge promises for this year, including doubling the supercharger network and adding 100 new service centers. More than halfway into his 3 to 6-month promise to cover all of North America with service centers, half of the states in the US still don't have one. Additionally, the company needs to average adding 1,000 supercharging stalls a month to meet expansion guidance, yet through 17 days in January, the total add number is less than 100.

While Tesla is cutting all of these jobs, it still needs to ramp up Model 3 production to levels it was supposed to be at a year ago. Of course, does the company even have demand for this many units? If you go to the company's website now, the Model 3 is available in the US in less than two weeks. Deliveries are also projected for March for China and certain European countries. Just factoring in the time needed to ship to those locations, demand must be very low, and we don't even have confirmation yet that Tesla can even sell in the EU (the homologation process). With Model S and X sales likely falling after tax breaks wind down in the US and Netherlands, along with the elimination of the 75 kWh versions, Tesla needs to increase Model 3 profits just to offset lower profits from its luxury models.

Remember, Elon Musk was just in China last week to break ground on gigafactory 3. That facility is supposed to be producing cars this year, yet capital expenditure guidance is flat compared to 2018, and that was before today's job cut announcement. How confident can investors be that Tesla will be able to meet its timelines for things like the Semi, Roadster, and Model Y now? We still haven't seen an official filing regarding the China factory in terms of cost or funding, although Elon Musk did retweet a Bloomberg article citing a $5 billion cost.

With Tesla shares falling roughly 10% on Friday, the pressure has certainly increased on Elon Musk and management. The company had a large restructuring just a few months ago that was supposed to set up the Model 3 for success, so that apparently didn't work too well. With shares now well below the convert price for the March 2019 notes, Tesla may now need to repay this nearly billion-dollar debt all in cash. Elon Musk has been hesitant to raise capital in recent years, but if Tesla swings back into loss territory, he likely will need another cash infusion. After Friday's big surprise, I'm guessing Tesla won't be rushing to announce earnings like we saw back in October.

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