June 12, 2018 / 9:11 PM / 2 months ago

Breakingviews - Tesla job cull is more signal than maneuver

NEW YORK (Reuters Breakingviews) - Tesla’s big-ideas man is sweating the small stuff. Chief Executive Elon Musk told employees on Tuesday that the $60 billion electric-car maker will cut 9 percent of its staff, in an acknowledgement that it’s hard to change the world while not being sustainably profitable. It’s more of a signal than an actual maneuver, but it matters, particularly to the financial community Musk has at times alienated.

The logo of Tesla is seen in Taipei, Taiwan August 11, 2017. REUTERS/Tyrone Siu

Tesla has never made a profit and isn’t about to start, if analysts are to be believed. Those polled by Eikon on average think the company will have positive earnings in the third quarter of next year. Paring the workforce back to 37,000, near where it stood in December, won’t tip the balance. Consensus estimates have the company making a pre-tax loss of $1.5 billion in the current calendar year. Even if it managed to halve its total sales and administration outlays, estimated at $2.9 billion, it would still lose money.

The way Tesla would grow into its heady valuation – nearly 40 times estimated earnings for 2020 – is by driving up its top line, rather than cutting its office costs. If the company can produce enough cars, at a high enough margin, its operating expenses will dwindle in proportion to gross profit. The big variable is how many of its Model 3 vehicles Tesla can kick out. Its current run rate is 3,500 a week, and Musk is aiming for 5,000 and then 10,000 a week in time. The new round of job cuts won’t touch the factory floor.

Pink slips don’t build cars, and sacking staff is never a happy affair. But it may help restore confidence among Tesla’s doubters. Musk is more interested in the long-term vision than this year’s profit, and didn’t endear himself to analysts when he lashed out at “bonehead” questions during the company’s first-quarter earnings conference call. That said, he has conceded that Tesla needs to be profitable, and pledged to comb through the company’s costs.

An investment in Tesla is mostly a bet that Musk can keep to his word on the big picture. But especially for those concerned about his high rate of cash consumption, trimming costs moves the needle in his favor.

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