Elon Musk warns employees Tesla Stock could be crushed if he doesn’t

These are heady times for You’re here (NASDAQ: TSLA) Investors. After all, the stock is up almost 600% year on year. The enthusiasm for its major electric vehicles catapulted Tesla into one of the most valuable companies in the entire stock market. Reports that Tesla will be added to the S&P 500 Index in December are responsible for the stock’s recent surge, but this is just the latest in a string of great news.

Yet with Tesla’s market cap of over $ 560 billion, Elon Musk himself can be increasingly nervous about his extremely high stock price. He expressed his concerns to employees in a recently leaked internal email.

Image source: Getty Images.

“Our stock will be immediately overwritten”

In the email, Musk asked employees to redouble their efforts to cut costs to boost Tesla’s profitability. At present, the market gives Tesla a huge advantage of the doubt that it will not only grow a lot, but also achieve margins closer to the software industry than to the auto industry.

Next year, analysts predict Tesla will increase revenue by just under 50%, but expect earnings per share to rise even more than 72%. This means that a series of growth and margin expansion is built into the stock price.

Now that the company has achieved profitability over the past year, Musk seems keenly aware that showing investors growing profits will be key to avoiding any disappointment that could lead to a massive sell-off of top-flight Tesla stock. Through its internal email to employees:

When you look at our actual profitability, it’s very low at around 1% for the past year. Investors give us a lot of credit for future profits, but if at some point they conclude that this won’t happen, our stock will be immediately crushed like a blast under a hammer!

For holders of Tesla shares, that’s not great to hear. However, Musk has also said in the past that Tesla’s share price is too high and that hasn’t stopped him from rising even higher.

Tesla must continue to cut costs to provide a more affordable car. Image source: Tesla.

Why Musk is so focused on costs right now

Musk is certainly right to focus on continuing to cut costs – and not just current year’s profits. Musk probably knows that in order to sell the volumes of vehicles he wants and the market is waiting for, Tesla will likely have to keep lowering the price of the Model 3. Currently, the Model 3s cost around $ 38,000. This is ahead of other add-ons that can easily push 3 models up to $ 50,000 or more.

It’s still too expensive for a mainstream vehicle, even with gas savings. Tesla recently outlined its goal of possibly selling its cheapest models for $ 25,000 over the next three years. The new vehicle would be powered by improved battery cell technology that cuts the cost of the EV battery, but it’s still really, really hard to do.

However, according to this recent internal email, Musk apparently doubles the ethics of frugal costs, even beyond the new battery designs:

Much more importantly, to make our cars affordable, we need to be smarter about how we spend money. It’s a tough game – requiring thousands of great ideas to improve part cost, a factory process, or just design, all while increasing quality and capability. A great idea would be one that saves $ 5, but the vast majority are 50 cents here or 20 cents there.

Encouraging or disturbing?

The recent email could be an encouraging or worrying sign for investors. This could be concerning as Musk may realize that Tesla cannot meet Wall Street’s high margin expectations with its current cost structure and technology.

On the flip side, it might also be encouraging that Musk is rallying the troops around this initiative. Under Musk’s leadership, Tesla has already emerged from deep holes. He achieved goals that many thought were impossible.

If the recent call to arms makes significant advances in terms of costs, that could be positive. We’d much rather have a CEO tackle issues head on rather than ignore them and let the company fall behind.

But the current share price already presumes all kinds of good news

Right after Tesla was included in the S&P, value investor Michael Burry, one of the investors profiled in The big court, revealed he was selling Tesla shares. This could be a worrying signal that Tesla’s stock has finally broken out. Many other value investors have sold Tesla in the past, all of whom have lost a lot of money on this bet against the company. However, it’s hard to dispute Burry’s claim that Tesla’s stock is insanely expensive right now, as the market values ​​all kinds of good news for EVs in the future.

In order to stay invested in Tesla at these levels despite Musk’s concerns and Burry’s short, you have to really, really believe that Tesla will continue to dominate the auto industry, while also moving to other energy products with big. markets and high margins. For me, it’s fun watching from the sidelines, but Tesla is still way too rich for my blood.