Just a little over a week ago, Tesla (TSLA) CEO Elon Musk issued a stark warning to the company's investors -- and to investors in general. Musk said he had a "super bad feeling" about the state of the global economy, and where it's heading. His feeling was bad enough, in fact, that according to some reports, Tesla might be preparing to lay off 10% of its workforce (or at least 10% of its salaried workforce) to right-size the company to meet diminished demand for electric vehicles.
Just a little over one week later, we just got more details on what has the Tesla CEO so worried.
As Morgan Stanley analyst Adam Jonas reports in a recent research note, Musk is trying to "rally" his "troops" at Tesla to make a big push delivering electric cars this month, in an effort to hit analyst targets for deliveries before the second quarter wraps up. Jonas notes that "multiple media sources" have confirmed this plea from Musk (but Tesla itself, which no longer has a media department, has not confirmed it yet).
Whether or not Tesla eventually confirms the media reports, a big push at the end of Q2 would both be standard operating procedure for Tesla -- and also entirely understandable considering how far behind production quotas the company probably is, after a weeks-long, Covid-inspired shutdown of Tesla's Shanghai gigafactory in China. As Jonas pints out, 40% of Teslas produced globally are produced right there at that Shanghai plant, and China accounts for "well over 50%" of the profit Tesla earns in an average quarter.
With just two weeks remaining in the quarter, though, it's doubtful Tesla will be able to make up its shortfall even with a big end-of-quarter deliveries push. If it fails to hit its target, though, how bad would that news be for Tesla?
Jonas has some thoughts on that score, and -- good news for Tesla shareholders -- he's not worried at all.
Jonas admits there's a risk Tesla will end up delivering fewer than 300,000 EVs in Q2 (He is thinking deliveries might top out at 292,000 units). He also predicts Tesla's revenues won't reach $18 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) might fall as much as 10% short of analyst expectations. Nevertheless, in the analyst's view, these misses will all be because of Tesla's inability to produce cars fast enough to meet demand -- not because of any lack of demand. Accordingly, Jonas believes a Q2 deliveries miss will create pent-up demand leading to a bumper crop of deliveries in Q3. And by year end, "any lingering impact of the Shanghai lockdown on Tesla production [will] probably [be resolved]."
And here's some more good news: According to Jonas, Tesla may be preparing to add China's BYD as a battery supplier for its cars. In the analyst's view, this is good news both because diversifying suppliers is always a good idea, and also because adding BYD to its supplier list will increase price competition -- and keep prices low -- for batteries coming from Tesla's preferred Chinese battery supplier, CATL. This creates the potential for Tesla enjoying stronger profit margins even as its supply and production problems work themselves out towards the end of this year.
It also helps to explain why, even as Tesla appears to be racing towards a Q2 "miss," Jonas still rates Tesla stock an Overweight (i.e. Buy) with a $1,300 price target. (To watch Jonas' track record, click here)
Overall, there’s a positive feeling on Wall Street about TSLA, along with some caution. The Moderate Buy consensus rating is based on 30 analyst reviews that include 16 Buys, 8 Holds, and 6 Sells. The average price target of $917.10 suggests an upside of ~34% from the current trading price of $683. (See TSLA stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Tesla (TSLA) is the world’s biggest automaker by market cap, but where does it stand today? Tesla’s shares shed around 9% on Friday after Musk shared his concerns regarding the economic meltdown with employees. TSLA stock took another hit on Monday and dropped by 4.8%. These shocks, though, will have little impact on Tesla's long-term growth story.
Growth stocks such as TSLA continue to struggle due to the continual increase in inflation rates. High inflation has resulted in the highest interest rates in years, leading to a healthy increase in the cost of car loans.
The Oracle Of Omaha, Warren Buffet, has repeatedly mentioned that "interest rates act as a gravity to asset prices,” which happens to be the cause of the TSLA's suffering.
Nevertheless, Tesla has been one of the largest automotive companies. It consistently reported market-beating results and has been the pick of the EV stocks. Over the past five years, its revenues have grown over 53.44% with a healthy increase in earnings. Results of late have also been stellar, with year-over-year improvement in sales at over 73%. Moreover, its free cash flow margin has also improved by triple-digits.
However, is inflation the only reason TSLA has declined? Or is there more to the downside of the stock than just the high inflation and higher interest rates? Let’s take a look.
On TipRanks, TSLA scores a 2 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to underperform the broader market.
Employee Layoffs – Bad News for TeslaNews website, Electrek, acquired a leaked email that Musk shared with company employees. The email showed that Tesla had a "tough quarter" and that the company planned to downsize the workforce by 10%.
The email also mentioned that the company planned to "pause hiring worldwide," which entails that Tesla will significantly reduce the thousands of open positions it was advertising when the email was dispatched.
In contrast, it is interesting to note that Tesla isn’t new to layoffs. The company reduced the workforce by 7% in 2019 and managed to sustain incredible growth. Given how Tesla dealt with layoffs earlier, there’s a probability that the company might benefit from the downsizing.
Along with this, China's decision to extend the lockdown has created supply chain issues for Tesla, and Musk is evidently ringing the panic button on the U.S. economy. However, the company is of the belief that China will ease lockdowns that will rectify the demand-supply imbalance.
A Brighter FutureRecently, Tesla submitted an annual proxy statement and released its proposal for a 3 for 1 stock split. The stock split is intended to allow for employees to more easily scoop up company shares. In addition, Tesla believes that this decision will reset the common stock price and make it more accessible to individual traders
Many companies use stock splits when stock prices are exorbitant, such as the case with Tesla. TSLA stock had been trading at a nosebleed valuation which had made it almost uninvestable. The recent market downturn has reduced the frothiness of the EV market, and the stock split will further reduce the stock price to more attractive levels.
Furthermore, Musk plans on utilizing Tesla shares to acquire Twitter and reduce his stake in the company to augment financing. The stock split will have little to no impact on Tesla’s fundamentals, but it will allow investors to buy the stock by stabilizing the share price.
Wall Street's TakeTurning to Wall Street, TSLA stock maintains a Moderate Buy rating. Out of 30 total analyst ratings; 16 Buys, eight Holds, and six Sell ratings were assigned over the past three months.
The average TSLA price target is $917.10, implying 38.39% upside potential. Analyst price targets range from a low of $67 per share to a high of $1,580 per share.
Bottom Line – Is Tesla a Buy?Tesla is expected to grow sales and experience rapid growth in the next 12 months. In the first quarter of 2022, Tesla enjoyed an earnings per share of $3.22, with sales rising by 81%. Moreover, with the substantial reduction in its stock price, it offers an attractive risk/reward.
Aside from the supply chain issues and Musk's rocky Twitter acquisition saga, the volatility in the U.S. economy has affected TSLA. Moreover, its lofty price multiples haven't helped either. Nevertheless, the EV titan's long-term bull case remains intact.
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