What happened
Shares of EV leader Tesla (TSLA -0.05%) were falling today, with shares falling by as much as 4.6%, before recovering to a 2.7% decline as of 1:52 p.m. ET.
The decline was all the more unwelcome as Tesla stock had already fallen by a significant amount following its first-quarter earnings on April 19. Moreover, the Nasdaq Composite was up by 0.8% today, making Tesla's dip all the more auspicious, as Tesla is a large component of that index.
Tesla received two pieces of incremental negative news today. First, it received a downgrade from a formerly bullish Wall Street analyst. More disconcerting, a National Labor Relation Board (NLRB) administrative judge issued a negative decision on yet another labor issue for Tesla -- which isn't the first time this has happened.
So what
On Wednesday, Jefferies analyst Philippe Houchois downgraded Tesla from buy to hold, while lowering his price target from $230 per share to $185.
Houchois is a bit late to the downgrade but is apparently reconsidering a few of his assumptions on Tesla, specifically around its long-term margin profile. The analyst is now pondering whether Tesla's previous industry-leading margins prior to recent price cuts and margin compression were in fact structural, or merely due to timing.
This question isn't settled, but Houchois may be wondering whether Tesla has exhausted a core customer base willing to pay higher prices for the brand and/or EVs, and if the new lower prices may be the "new normal," and not just a symptom of today's economic environment. According to Houchois, Tesla hasn't proven its price reductions will necessarily be made up in large volume increases, based on Q1 results. While the matter certainly isn't settled, the open question was enough for Houchois to lower his base case margins in his model.
In a second dose of negative news, NLRB Administrative Law Judge Michael Rosas ordered Tesla to "cease and desist" from what Rosas ruled was a violation of workers' rights at a Florida-based Tesla collision center and repair shop.
The issue at hand refers to a late 2021 complaint that new workers were hired at a higher pay rate than existing workers. When workers complained about the practice to senior managers, supervisors instructed workers at that collision center not to complain to senior management. The worker who initially complained was also subsequently fired soon thereafter. According to Rosas, the attempt to silence employees violated labor law.
Unfortunately, this isn't the first time Tesla has been found to have violated workers' rights. Last month, another Appeals Court judge ruled against Tesla as well, upholding a NLRB ruling that CEO Elon Musk's tweet stating Tesla workers would lose stock options if they joined a union also violated the law. And the company continues to face sex and race discrimination lawsuits involving its plant in Fremont, California.
Now what
While these two data points are each negative for Tesla, they actually point to the same larger concern for the automaker around its long-term margin profile. After all, legacy automakers have larger unionized workforces and higher labor costs, which Tesla has taken great pains to avoid. But if Tesla workers are able to organize more in the future than they have previously, it could cut into the carmaker's margins by an even greater amount.
Tesla's operating margin already fell from 19.2% a year ago to 11.4% last quarter, reflecting the price cuts Tesla took to drive volume since late last year. Rival automakers Ford and General Motors have trailing-12-month operating margins of 4.9% and 7.7%, respectively.
While Tesla may still be able to retain its best-in-class margin profile over competitors, it also has a much higher bar to clear, as its stock trades at 46 times earnings, in contrast with the single-digit P/E multiples of peers.
