Tesla: Challenges are much greater than employment (rating downgrade) (NASDAQ:TSLA)

In the past six months of tracking Tesla company (Nasdaq: Tesla) stock here at Seeking Alpha, the first time in November last year and the second time in February, I was focused on Her work-related challenges. It appears that the unrest that began in Sweden, before spreading to other Nordic countries, will now be resolved. But that didn’t quite happen.

On the contrary, spillovers from business challenges coupled with other related issues at the company level and the EV industry have transformed into a completely different business-related impact. Layoffs. Not surprisingly, the stock is down nearly 30% year-to-date. Here, I take a closer look at the developments of the past months that led to the current situation and assess whether there is hope for an uptick in stock for the remainder of 2024.

The industrial movement continues…

Last month, Tesla CEO Elon Musk struck an optimistic note on the Swedish labor union issue, saying he believed “the storm has passed.” But developments since then suggest otherwise. The industrial action that began last October, which led to sympathetic action by unions in various industries in the Nordic countries, was now joined by the private trade union, Unionen, earlier in May.

For perspective, Unionen is the largest private trade union in the country and also the largest white-collar union in the world. This is expected to impact the company’s work at DEKRA Industrial AB, which provides independent inspection, testing and certification services for equipment in various industries. In other words, the pressure on Tesla has not subsided in the region.

..But economic conditions are improving

However, coupled with the fact that the Nordic region accounts for less than 3% of Tesla’s revenue, some relief in Sweden’s cost-of-living crisis could be a relief. Inflation fell to 2.2% year-on-year in April compared to 7.2% a year ago, and this may create better conditions for negotiations. This is only half of the macroeconomic picture, considering that Sweden has just emerged from a technical recession (see chart above). Relatedly, despite the small size of the market, demand for cars is expected to be weak at the present time. However, there is still some improvement from where the economy was a few months ago.

Eyes on Germany

In another relief for Tesla, the risk of industrial action spilling over into important German operations has not yet materialized. This may be partly due to the company’s actions. Shortly after the start of industrial work in Sweden, the company increased wages and also offered additional bonuses to production workers in Germany, where it plans to increase production to one million cars per year. As in Sweden, inflation has also slowed. Germany’s inflation rate for April fell to 2.2%, less than a third of what it was this time last year (see chart below).

Even otherwise, things are improving in the country for Tesla. The city council of Gruenheide, where its factory is located, recently approved Tesla’s expansion. This is important because it faced hurdles earlier this year due to the public’s environmental concerns and climate protests are still ongoing. While other approvals are also required, including from environmental authorities, this is still a step forward, especially after the company’s production in the country suffered in the first quarter of 2024. Deliveries were affected by militant attacks in the Red Sea and an arson attack near From its facilities. factory, resulting in a power outage.

Poor performance leads to layoffs

Even with steps toward expansion in Germany and the lower likelihood of further industrial action, pressure from the company’s European operations helped weigh on its performance in the first quarter of 2024. This is evident in a 2% decline in production, also affected by a slowdown in the pace of work at Fremont. , California. This, coupled with weak demand for electric vehicles, increased competition and a lower average selling price, resulted in a 9% decline in revenue.

However, to Tesla’s credit, it kept tabs on profitability through cost-cutting measures, and saw a 9% reduction in cost of revenue. However, the 36% increase in operating expenses, which presumably includes higher labor costs as well, is still causing damage. Operating margin fell to a low of 5.5%, reversing the increase seen in the fourth quarter of 2023 after four consecutive quarters of weakness. It also saw a 47% decline in non-GAAP earnings per share (EPS).

With the broader demand environment unlikely to stabilize soon, rather than with the US economy slowing, Tesla is taking drastic measures. In the days following the results, it decided to lay off 10% of its workforce, and the number could be higher in the future.

High market multiples

With this backdrop, it is natural that Tesla stock has seen difficult times in recent months. Since I last wrote about this topic in February, it has fallen by 10%, and has seen a further decline of 25% since I first covered it in October of last year. Even then, it is trading at much higher valuations than its peers (see table below). The peers represent the following Big Four automakers by EV market share: BYD (OTCPK:BYDDF), General Motors (GM), Volkswagen (OTCPK:VWAGY), and Stellantis (STLA).

While there was justification for a premium over Tesla in the past given its huge market share, the competition is starting to catch up. This is evidenced by its share of US electric vehicle sales falling in the first quarter of 2024 to 51.3% from 61.7% a year ago, making it more difficult to justify the now higher multiples.

What then?

In the past six months, business challenges at Tesla, Inc. have been challenging. Difficult and more of them appeared. Although it’s a consolation that strikes have not spread as much as previously feared, higher worker pay will likely spill over into larger costs in the first quarter of 2024 as Tesla production is disrupted and electric vehicle demand growth slows. Disappointing financial performance in the quarter led to further layoffs.

To be fair, the company’s production could rise from this quarter onwards and cost-cutting measures could stabilize profits. But even then, market multiples look high, and this is not the year in which demand for electric vehicles is likely to grow quickly. As such, at the moment, it is difficult to see upside for Tesla stock right now. I will downgrade it to Sell, until tangible signs of improvement appear in both the industry and the company again.