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Tesla's 7% Head Count Cut Comes Down to the 1 Thing It Lacks

By Motley Fool Staff – Updated Apr 22, 2019 at 9:52PM

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Nobody can say its electric cars are not impressive in most ways. But...

Check out the latest Tesla earnings call transcript.

Elon Musk hasn't had the best year as CEO of Tesla (TSLA -3.21%). PR debacles. The feint toward going private. Production and delivery holdups. Even the long-awaited ramp-up past 5,000 Model 3s a week hasn't quieted the jitters, and share prices have oscillated between highs around $380 and lows near $250. At least some of the issues, though, revolved around investors' faith that Tesla could sell enough of its cars at a profit to justify its valuation. Given that, the news last week that Tesla was laying off 7% of its workforce in an effort to reduce costs -- and the sticker prices of its vehicles -- might have pleased investors. Instead, they slashed the share price.

In this segment of the Motley Fool Money podcast, host Chris Hill and senior analysts Andy Cross, Ron Gross, and Jason Moser reflect on Telsa's goals, its strengths, and the one key weakness in its business model that led to this layoff.

A full transcript follows the video.

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This video was recorded on Jan. 18, 2019.

Chris Hill: Shares of Tesla falling around 10% on Friday after the company announced it is cutting its full-time workforce by 7%. CEO Elon Musk said the company needs to lower costs while also increasing production on the Model 3. Jason, 2019, not off to a great start for Tesla.

Jason Moser: No. If you remember, SpaceX is going to be cutting jobs, as well. It does stink for people losing their jobs. From a business perspective, this is a good thing, which is why I thought the stock would be up on the news. It's always a coin flip, really. The market is selling the stock off on this news, which is a little interesting. But when it comes to Tesla, it's about figuring out ways to cut costs, ramp up production.

Ultimately, this goes back to coming up with cars that people not only want, but they can afford. It goes back to this debate we've had for probably five years, as to whether Tesla actually has pricing power or not. It always struck me that they didn't. The cars were essentially built, they're very expensive, you have to offset some of that cost with tax credits and whatnot. And to attract a bigger audience, they typically are not going to be paying up for premium automobiles. I mean in Musk's own words here, in the email he sent, I'll quote this, he said, "The need for a lower-price variant of Model 3 becomes even greater on July 1st, when the U.S. tax credit again drops in half, making our car $1,875 more expensive, and again at the end of the year when it goes away entirely." Does Tesla have pricing power? I would say no. I think they're making the right call here in figuring out ways to whittle down costs because they are, I believe, stepping into a very challenging period.

Andy Cross: Building on that silver lining, what Elon said in his email which caught my attention was, "We're reducing headcount by 7%. We grew by 30% last year, which is more than we can support." So, here's the thing we've been looking forward to from Elon Musk, which is to show that he can run this company as a CEO, as a real car company. I saw that in that letter. That's what impressed me and gave me encouragement for Tesla shareholders and customers going forward.

Moser: I agree with that, totally. He looks like a guy who is ready to run this business, not just offer up big old grandiose visions.

Hill: They're going to report earnings on February 5th. He was pretty clear last year that, when they reported a profit, we're going to be profitable every quarter. What do you think?

Moser: I like to underpromise and overdeliver, so I might have done it a little bit differently. I guess time will tell.

Ron Gross: He's one of those CEOs that will get it done, no matter whether they have to work double time, cut costs, whatever they have to do on either the top line or the expenses. If he said it, he's going to try to get it done.

Andy Cross has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Stocks Mentioned

Tesla Stock Quote
Tesla
TSLA
$174.04 (-3.21%) $-5.78

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