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Why Tesla Stock Was Slammed Today

By Daniel Sparks – Updated Apr 20, 2019 at 12:55AM

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The capital-intensive nature of the auto business is pressuring the company's profitability.

What happened

Shares of electric-car company Tesla (TSLA 5.95%) slid on Friday, falling 8.8% as of 9:54 a.m. EST.

The stock's decline comes after CEO Elon Musk sent a letter to employees announcing a 7% workforce reduction as part of an effort to reduce costs and remain profitable.

Vehicle production in Tesla's factory in Fremont, California

Image source: author.

So what

"Tesla has only been producing cars for about a decade and we're up against massive, entrenched competitors," Musk wrote in the letter, which was also posted on the company's blog. "The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products."

The company is reducing its full-time employee head count by about 7% and is retaining "only the most critical temps and contractors," Musk said. In addition, he said Tesla will need to continue to increase Model 3 production while bringing to market lower-cost variants of the vehicle in order to see improved economies of scale and reach a wider market. Notably, Tesla's workforce will still be significantly larger than it was in 2017, as the company increased it by 30% in 2018.

Now what

For its recently ended fourth quarter, Tesla estimated in the letter that it will report a smaller GAAP profit than in Q3. This means it will be lower than Tesla's third-quarter GAAP profit of $312 million, or $1.75 per share.

For the company's first quarter, a profit is possible but less likely. "This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort, and some luck, to target a tiny profit," Musk said.

Check out the latest Tesla earnings call transcript.

Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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