Tesla’s latest speed bump

Electric-vehicle maker Tesla is axing 7% of its staff to cut costs and make its cars more affordable – a belated dose of realism. Matthew Partridge reports.


Elon Musk: forced to focus on mundane matters

The man who promised he'd "help save Earth for humanity" and "colonise Mars" is now being forced to focus on some more "mundane goals", says Russ Mitchell in the Los Angeles Times. In a note to employees last week Musk announced that although last year "was the most successful... in Tesla's history", he was going to fire 2,500 workers (around 7% of the company's full-time workforce) in order to cut costs.

The hope is that this will help get Tesla closer to its goal of a $35,000 mass-market Model 3 electric car, which currently looks like a "mirage". At present, "none of Tesla's cars... is priced for a middle-income buyer". Customers usually pay around $60,000 for a Model 3 after adding a few extras; they start at $44,000.The news went down badly on Wall Street, with the company's share price falling 13%.

The move has prompted investors to question whether Tesla "can sustain demand for its priciest vehicles", says Matthew Rocco in the Financial Times. Still, Tesla isn't the only car company tightening its belt "as costs rise and competitive pressures increase". For example, General Motors announced a few weeks ago it was cutting back in North America and Canada, while Ford has announced cuts in Europe. There's also the hope the launch of Tesla'sModel 3 in Europe and China could offset any drop in demand in the US.

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Lowering expectations

The problem is that while investors in car companies usually "judge their companies chiefly on how quickly management accepts the essential grimness of their reality", Tesla isn't meant to be an ordinary car company, says Bloomberg's Liam Denning. So while it's "laudable" it is trying to increase efficiency, the fact is that "spending and capital investment should be increasing" so that the company has a chance of producing the "staggering growth" required "to justify" its valuation. These redundancies, along with price cuts, are undermining "the story of limitless growth".

Moreover, although it's "hardly unprecedented" for an upstart company to expand too quickly, "growing pains aren'tbaked into the company's lofty valuation", says Charley Grant in The Wall Street Journal. The cuts, as well as $10bn in debt, are going to make it even harder for Musk to fulfil grandiose promises of fully self-driving cars, new passenger and freight vehicles and roofs that can generate solar power for homes. It's going to be interesting to see how long investors can "insulate themselves from reality", giventhe stock trades at 50 times 2019 earnings. What's more, "those earnings estimates are likely heading lower and that multiple higher".

All this talk of cutbacks is "effectively a profit warning", says Reuters' Antony Currie. Still, it's refreshing to hear a "rare dose of realism" from Musk, who has spent far too much time hyping up the car company's performance. If his "unusual openness" is the start of "a more pragmatic approach" after "years of overpromising", then that's no bad thing.

Britain's ten most-hated shares

Swipe to scroll horizontally
CompanySectorShort interest on 23 Jan (%)Short interest on 28 Dec (%)
Plus500Financial Services13.1210.42
Arrow Global GroupFinancial Services12.4512.1
Ultra ElectronicsDefence12.1810.82
Marks & SpencerGeneral Retailers11.3711.6
DebenhamsGeneral Retailers10.6310.26
Wood GroupOil Services9.42NEW ENTRY
AASupport Services9.277.97
Pets at HomePet Retailers8.769.33
Babcock InternationalEngineering7.85NEW ENTRY

These are the ten most unpopular firms in the UK, based on the percentage of stock being shorted (the "short interest"). Short-sellers aim to profit from falling prices, so it helps to see what they're betting against. The list canalso highlight stocks that may bounce on unexpected good news when short-sellers are forced out of their positions (a "short squeeze"). Engineering firm Babcock's chairman Mike Turner is to leave amid rumours that the group is in poor health; BNP Paribas has downgraded troubled oil services firmJohn Wood Group.

City Talk

Many people will be feeling a "certain schadenfreude" at Ryanair's latest profit warning, saysThe Independent's James Moore: the budget airline has "made scant effort to win friends among customers, staff, the media, even investors on occasion".And CEO Michael O'Leary has warned forecasts may be reduced further owing to intense competition over the winter. However, Ryanair still has "both the resources and the wherewithal to outlast and outpunch its rivals when it comes to the current price war". This means that when the fracas finally ends, Ryanair will be "in a good position to make back the money it has lost, and more".

Before his arrest, Nissan's Carlos Ghosn (pictured) was the "quintessential Davos figure", says Bloomberg. However, instead of "hobnobbing with the global elite" at Davos, he's now "languishing in a Tokyo prison". And this is unlikely to change any time soon since a court has rejected his "last-ditch" bail effort. This was despite his offer last Monday to remain in Japan, "pay for an electronic tracker" and be monitored by private security guards while he awaits trial for understating his income at Nissan by "tens of millions" of dollars and misusing company funds.

Last week Netflix announced it was increasing prices for its US consumers, a move cheered by analysts, says the Financial Times's Anna Nicolaou. Although a "mixed performance on revenues, earnings and subscriptions" a few days later ended the rally, investors still have reason for cheer. The 29 million rise in the number of subscribers underscores Netflix's ability to attract new customers as it pours billions into new films and television shows, "regularly outbidding traditional Hollywood studios and TV networks".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri