U.S. Markets closed

Dumping Home Depot Is a Bad Sign for Tesla Inc. Stock

Laura Hoy

This week was a crazy one for electric vehicle maker Tesla Inc. (NASDAQ:TSLA). The company made headlines when an internal memo from CEO Elon Musk revealed that the firm would no longer use Home Depot (NYSE:HD) as a sales partner for its residential solar energy products. Whether it is a good move for Tesla stock remains to be seen.

Among other things, the email revealed that Musk is planning a significant restructuring plan that he hopes will lead the company to finally turn a profit after 15 years in the red. 

The email sent the firm’s share price more than 3% higher as investors cheered Musk’s focus on profitability, but before you jump on the TSLA stock bandwagon, read the email and ask yourself- is this really good news?

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Ditching HD

The part of Musk’s email that has been making headlines has been the company’s plans to ditch Home Depot as a sales partner for its solar panels. This was a big part of the reason that investors cheered the email. Instead of selling the residential solar panels via booths inside HD stores, the company will focus on selling from its solar side through Tesla locations and online. 

The narrative that Musk and the bulls are spinning is that the HD partnership simply wasn’t a beneficial to Tesla stock as initially believed. However, it’s only been a few months since the two struck up a partnership so there hasn’t been much time for the firm to evaluate whether the retail partnership has potential, at very least investors should be concerned about the timing. 

With that in mind, investors should be questioning whether or not Tesla’s solar business is on the ropes. Is the firm really planning to shift its focus toward online sales, or is Musk going to pare back the solar side of Tesla in order to bring the company toward profitability?

Solar power was a big reason many traders got on board with Tesla stock in the first place and the company spent $2.1 billion building out that arm of the business just a few years ago. It certainly wouldn’t be a good sign for Tesla to be giving up on solar power now.

Layoffs

Perhaps the more troubling part of Musk’s email was the fact that he’s planning to lay off 9% of the company’s workforce. According to Musk, the majority of the layoffs will affect salaried employees rather than production associates, meaning that assembly line staff will still be retained in order to meet Model 3 production targets.

This aspect of the email is worrying for two reasons. First, it’s never a good sign when a company starts laying off a large number of employees. No matter how you spin it, layoffs suggest that things aren’t going well. 

The only way that cuts like these could possibly be construed as positive would be if it were assembly line workers who were given the boot. That would mean Musk was successful in automating the production line for his Model 3 cars, and might be worth cheering about. However, that’s not the case and investors should be worried about this development.

The Bottom Line on Tesla Stock

The only real silver lining from this news was the fact that Musk and Tesla are planning to focus more on profitability in the coming months. But to me the letter looks like a veiled way of saying the firm is struggling to meet its financial obligations and needs to cut back. 

Later this year some of Tesla’s debt payments will start to come due. Morgan Stanley analyst Adam Jonas estimated that the firm will need to raise around $2 billion in order to pay off those debts as well as continue ramping up production on the Model 3.

That makes the timing of this ‘restructuring plan’ suspicious. Is this Musk’s way of meeting financial obligations? If so, can you really consider cutting employees and scaling down parts of the business to be a sustainable way to operate?

I’m not sure exactly what the Tesla stock bulls are seeing between the lines of Musk’s company email, but to me it looks like the company is in for a rocky ride. That’s not to say that Tesla is going under, but I’d be wary to chase this rally because it looks unfounded.

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities. 

More From InvestorPlace

Compare Brokers

The post Dumping Home Depot Is a Bad Sign for Tesla Inc. Stock appeared first on InvestorPlace.