Cost cutting sets in with Tesla considering to cut 10% of workforce

Technology companies are executing the Sequoia Capital memo

By Peter Garnry, Head of Equity Strategy at Saxo Bank

Peter Garnry

Technology companies seem to be executing the advice in the latest Sequoia Capital presentation arguing for companies to cut down on costs now and improve profitability or else face a survival mode as the economy and investing landscape have changed. Companies are no longer rewarded for breath neck revenue growth at all costs. Tesla is the latest company to set its eyes on cost cutting with Musk pausing hiring worldwide and stating that the EV-maker must cut 10% of workforce.

Wednesday night we saw a bunch of earnings releases from Elastic, MongoDB, UiPath and Pure Storage – all delivering higher profitability (or narrower loss) than estimated by analysts suggesting cost cutting is widespread in the corporate sector. Effectively, it seems technology companies are reacting to the advice of Sequoia Capital to cut costs now and adapt to survive the coming crisis.

Companies are no longer being rewarded for high revenue growth at all costs, but are instead rewarded for increasing return on invested capital and free cash flow generation. Besides these latest positive earnings releases from tier 2 technology companies sentiment has generally been positive and extended yesterday, but this morning Tesla is pouring cold water on the momentum taking the Nasdaq 100 futures lower.

Elon Musk, the CEO of Tesla, says that EV-maker needs to cut staff by 10% as he has “super bad feeling” about the economy in an email that Reuters has seen. The email headline says “Pause all hiring worldwide” and follows up on his latest two emails saying all workers must work at designated Tesla offices instead of remote suggesting pressures are increasing for EV-maker as elevated energy and metals prices are eating into gross margins (excluding the sales of its Autopilot software). We do not have a high confidence in Musk’s ability to predict the economy, or anything for that matter, but he is seeing things globally that is warranting this move and as such the decision carries valuable information about the trajectory of the global economy echoing Jamie Dimon, CEO of JPMorgan Chase, saying yesterday that the economy is headed into a “hurricane”.