It seems electric vehicle manufacturer Tesla (NASDAQ:TSLA) is always in the headlines. But over the past several weeks, the Tesla headlines have been dominated by one common theme: job cuts. In late January, Tesla announced that it would cut about 7% of its workforce. Ever since, there have been a slew of reports regarding Tesla layoffs, all of which seem to strike the same bearish tone that job cuts are indicative of dwindling Tesla popularity and demand following the big, late-2018 Model 3 surge.
Ever since Tesla announced big job cuts in late January, Tesla stock has dropped from $350 to $310.
But, this “job cuts are bad” mantra is the wrong takeaway here, because it ignores the “why” behind the job cuts. Tesla is cutting jobs not because demand is falling. Rather, the company is right-sizing operations in order to continue to drive EV prices down. That’s a big positive. Falling EV prices will translate into broader vehicle adoption, bigger sales and bigger profits.
Those three things will lead to a higher Tesla stock price.
Thus, job cuts are actually good for Tesla stock. They lay the groundwork for this company to continue to democratize the EV industry so that, eventually, everyone and anyone can afford a Tesla vehicle. So long as Tesla remains on that growth trajectory, Tesla’s delivery volumes, revenues and profits will roar higher — and so will Tesla stock.
Job Cuts Are a Positive
Everyone seems to be beating this drum that job cuts at Tesla are a sign of tough times. To be sure, no one cuts jobs when times are great. But these job cuts aren’t a negative development for Tesla stock. Instead, they are quite the opposite.
The formula here is simple: Tesla cuts jobs and right-sizes operations. This pulls costs out of the system. When the overall cost structure of the business is lower, that allows Tesla to lower the prices of its vehicles, too. Lower prices supercharge demand and broaden customer reach. That leads to much higher vehicle deliveries at slightly lower average prices. Revenues march higher. Gross margins remain stable. Profits soar. Tesla stock soars too.
From this perspective, job cuts are simply the first step in a long-term winning formula for Tesla stock.
The market doesn’t see it that way, though. Tesla stock has dropped more than 10% since job cuts were announced. This irrational weakness is an opportunity. In mid- to late-2019, because of early 2019 job cuts, Tesla will release lower-priced variants of the Model 3. Those lower-priced variants will be met with huge demand. That will drive revenues and profits way higher.
Investors will rally around that robust profit growth in mid- to late-2019, and Tesla stock will bounce back.
Long Term Growth Narrative Is Promising
In the big picture, Tesla is pioneering a global EV revolution that is still in its early innings. The two things keeping this revolution from moving into the latter innings — or gaining true mainstream adoption — are price points and infrastructure. Tesla is working hard to remove those two frictions, and is well ahead of the competition in doing so.
As a result, the current outlook for Tesla remains a company that will one day be the unchallenged leader in an EV market that will inevitably represent upwards of 30% of the global vehicle market. If you do that math on that, then Tesla could one day be looking at 2 million annual deliveries, $115 billion in annual revenues, and $10 billion-plus in net profits. Those metrics easily lend themselves to Tesla stock having a market cap of over $200 billion one day.
Tesla’s market cap today is just over $50 billion. Thus, Tesla stock has quadrupling potential over the next several years.
Bottom Line on TSLA Stock
The market is grossly overreacting to job cuts at Tesla, and wrongly misinterpreting this as bad news for Tesla stock. Instead, the opposite is true. Right-sizing is the first step in a long-term winning formula for Tesla stock that comprises democratizing the EV market to a point where Tesla vehicles are affordable for everyone.
Hence, recent job cuts and the related weakness in Tesla stock is a buying opportunity. Long-term, potential upside in this name is tremendous.
As of this writing, Luke Lango was long TSLA.