Stocks

Tesla (TSLA) Can't Catch a Break

Close-up of Tesla logo
Credit: Moose - stock.adobe.com

To many people, Elon Musk is not a very sympathetic figure. He is, after all, the poster child for the “tech bro,” a young man who has accumulated massive amounts of wealth and who treats us to his views on almost every subject, whether we want to hear them or not.

However, this morning, I do feel a little sorry for him and the company that has brought him all that wealth, Tesla (TSLA). They just can’t catch a break. Most of the time, when a company announces significant layoffs, Wall Street cheers. It is one of the things that annoys and baffles a lot of people outside the world of finance, but staff cuts are usually seen as a positive for a company because they represent cost controls and show a focus on margins, which traders and investors typically applaud.

That, however, hasn’t been the reaction in TSLA so far this morning after the company announced that it will be laying off around 10% of its global workforce. Instead, the stock is being hit once again with the cuts being seen as evidence of a demand slump. It will open around 4% lower this morning as I write this, even though margins have been frequently cited as one of the reasons for the fact that TSLA has dropped around 35% so far in 2024.

Tesla is being punished for doing what the market suggested. That may seem unfair, but why is it happening, and what does it mean for the future of the stock?

In part, the personality of the company’s iconic founder, or at least the market perception of him, is to blame. Musk has gone from being viewed as a genius who could do no wrong, to someone who money managers are wary of. That shift came after the purchase of Twitter, which looked to many people like an ego move or something driven by politics rather than a sound business decision.

Whether or not you agree with the assessment that X (formerly known as Twitter) is a distraction for Elon Musk, the problems there don’t directly impact Tesla, and doesn't explain the selloff in TSLA stock.

The main thing that seems to be going on here is the market adjusting to reality after a few years of pricing in seemingly endless massive growth in both the EV market in general and Tesla’s share of that market in particular.

In 2020, TSLA’s P/E was nudging quadruple figures, something that was obviously not sustainable. To some extent, though, it does look justified as earnings have largely caught up. The P/E last year was down to just over 60, despite the price of the stock being significantly higher than in 2020.

TSLA chart

This year, the P/E has climbed but not because of optimism. Rather, it is because earnings growth has stalled, and even turned negative. That is due to increased competition in EVs hurting sales, but it is also because Tesla was a bit slow to react to that new environment. Their cars were priced at a significant premium and their costs were more suited to a premium brand with market dominance, rather than a brand in a highly competitive market.

It has taken time, but they are now making the necessary adjustments -- cutting prices, offering incentives and cutting costs. In the short term, all of those things are hurting the stock, but they are setting up Tesla to survive and even thrive in a market that is completely different from that which they faced four years ago.

Ultimately, that is a good thing, and while the selling may continue for a while, at some point the futureproofing will pay dividends and TSLA will bounce back. That makes averaging into a position over the next few months or adding to an existing position, as I will be doing, look like the smart thing to do.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio