Shares of Tesla (NASDAQ: TSLA) were slammed on Friday, falling more than 9%. The growth stock‘s slide came as Tesla CEO Elon Musk expressed concerns about the economy in an email to employees, according to Reuters. In addition, Musk said the electric car company plans to cut about 10% of its workforce.
This news comes at a bleak time for the economy and a difficult few months for Tesla. Regulation in China relating to policies aimed to curb the spread of COVID-19 in the region have negatively impacted the automaker’s supply chain in 2022, including leading to periods of paused and limited production at the company’s important factory in Shanghai.
Given all that is going on, should investors be worried about Tesla?
Don’t forget: Sales are soaring
While it’s possible that Tesla’s second quarter may be faring worse than expected, there’s still a good chance that things are rosy compared to how many other companies are getting along during these challenging times. For instance, Tesla’s Q1 production and deliveries soared 69% and 68%, respectively. Furthermore, management said it expected production to grow 50% or more for the full year despite the challenges it was facing from limited production in China and production constraints from some of its suppliers.
In addition, Tesla has been raking in massive amounts of free cash flow. In Q1 2022, free cash flow was $2.2 billion — up 660% year over year. Net income was $3.3 billion, representing more than a sixfold increase. Financials like this help companies get through difficult times and detours.
Given the automaker’s recent momentum and management’s commentary about its full-year expectations at the time of its Q1 update, any worse-than-expected performance from Tesla will likely be far from a poor or even mediocre business outcome. Indeed, the company will likely grow much faster than all other major automakers in 2022 — even in a tumultuous economic environment.
Tesla has done layoffs before
It’s also worth noting that Tesla is no stranger to layoffs. The company laid off employees back in 2019 amid its Model 3 production ramp-up. It was able to keep up extraordinary growth rates despite reducing its headcount by about 7%.
While it is unfortunate for those employees who are losing their jobs, the reality is that companies can become bloated over time when it comes to headcount. From time to time, therefore, it may make sense for a company to reassess which jobs are the most essential and which ones may not be necessary.
Given how well Tesla’s last layoffs went, there’s a good chance that this one could positively impact the company as well.
Tesla will leave production headcount untouched
Finally — and most importantly — investors should keep in mind that this is a strategic layoff, leaving some important departments untouched.
“Note, this does not apply to anyone actually building cars, battery packs or installing solar,” Musk wrote in the purported email to employees.
This is critical because Tesla has remained supply constrained. In other words, demand continues to exceed supply; so the company’s bottleneck at the moment is vehicle production.
Overall, this strategic headcount reduction is likely good news for Tesla investors as it may make the company more nimble at a time of uncertainty. While headcount reductions don’t make sense for every industry or for every company, it will likely prove to be a good decision for a capital-intensive business like Tesla in a highly competitive industry.
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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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