Does Elon Musk’s Latest Move Mean Tesla Is Doomed?

Tesla's layoffs include a division that CEO Musk just called “essential” to the company's survival.

Tesla (TSLA) is taking a knife to a division that company CEO Elon Musk recently called “essential” to the company's long-term success, raising fresh questions about the world's largest automaker by market cap.

On Tuesday, according to Bloomberg, the company laid off more than 200 employees working on Tesla's Autopilot driver assist software, shuttering an entire office located in San Mateo, Calif. The affected team was responsible for processing and labeling customer vehicle data.

Last week, Musk confirmed Tesla was in the process of cutting about 10% of its global white-collar staff, arguing that the electric vehicle manufacturer had grown too fast and was now overstaffed. These cuts appear to be a small part of the overall engineering effort inside the company, but they come at a key moment in Tesla's effort to perfect fully autonomous vehicles.

Could Tesla be worth “basically zero?”

Musk has long-championed the concept of autonomous vehicles, in 2019 calling Tesla vehicles “appreciating assets” because of his confidence that Tesla owners could one day deploy their vehicles as robotaxis and make money on the cars instead of leaving them in parking lots.

In an interview with a Tesla owner group earlier this month, Musk said it was “essential” for Tesla to produce full self-driving technology, calling the tech “the difference between Tesla being worth a lot of money or worth basically zero.”

Although Tesla is the sales leader in electric vehicles, the company faces more competition now than at any time in its history. Incumbent automakers including General Motors and Ford have made electric vehicles a priority, joining newcomers including Lucid Group and NIO in bringing rival vehicles to market.

Tesla's self-driving technology is seen by company bulls as a major competitive advantage. Cathie Wood's Ark Invest earlier this year said Tesla's stock could be worth as much as $4,600 per share — more than six times its current price — by 2026, assuming robotaxis are in service by then.

Ark believes Tesla could generate more than $450 billion in annual revenue from its nascent robotaxi business.

Is Autopilot veering off course?

The layoffs also come at a time when Autopilot is under increasing regulatory scrutiny. Last October, the head of the U.S. National Transportation Safety Board (NTSB) called Tesla's marketing of the driver assistance software “misleading.” More recently, the separate National Highway Traffic Safety Administration upgraded a probe into Tesla's systems ahead of a potential recall or new limits on how the system is used.

Tesla's systems, unlike most of its rivals, forgo radar and other depth perception technology, relying instead on cameras to feed its AI and keep the vehicle on the road. The team that was reportedly let go on Tuesday was responsible for helping to train and refine Tesla's AI.

Tesla investors need this tech to work

Tesla delivered more than 936,000 vehicles in 2021, and as an automaker has never looked more stable in its history. However, the stock price and the health of the business have always been somewhat disconnected, and investors should be watching the developments of Autopilot closely.

Although it seems unlikely Musk is correct and Tesla's value could drop to near zero, as an automaker Tesla is valued significantly higher than the competition. Tesla trades at more than 21 times its book value, while both Ford and General Motors trade at little premium to their book values.

As Ark's model notes, Tesla commands that valuation based on its technological prowess, not its ability to manufacture cars.

Musk deserves credit for trying to streamline Tesla ahead of a potential economic slowdown, and has earned the benefit of the doubt over his years running the company. But for the valuation to hold up, Tesla will have to show progress toward autonomous driving in the quarters to come.

Investors need to hope Musk isn't cutting too deep, or in the wrong places, or his words of warning could become a self-fulfilling prophecy about the stock price.

Originally published on Fool.com

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio Inc. and Tesla. The Motley Fool has a disclosure policy.