Morgan Stanley: Tesla Will Surge To $400 Before Crashing To $200

When it comes to Wall Street cheerleaders, Tesla has few closer friends than Morgan Stanley"s Adam Jonas (current price target of $379). To be sure, the relationship cuts both ways, with Jonas relentless enthusiasm "for the EV maker granting Morgan Stanley a reserved spot for any future debt, convert and equity underwriting, as well as associated IB fees.  Yet, following the recent volatility in Tesla"s business model, in which the "production hell" that is Model 3 has been quietly relegated to the latest and greatest hype involving the company"s truck (funded in turn by deposits for the new Tesla $250,000 flying roadster) as well as stock price, not even Jonas can pretend that it"s smooth sailing ahead.

And so, in his latest forecast released overnight which has the same interval of confidence as a bitcoin price prediction, Jonas previews the stock performance of Tesla over the coming year, writing that he expects "Tesla shares to be extremely volatile in 2018, divided into two stages: (1) The alleviation of production bottlenecks with strong cash inflow, and (2) mounting concerns over the sustainability of the competitive moat."

His enthusiasm is even more constrained in his thesis:

Our Equal-weight rating on Tesla expresses our view that any number of positive and negative forces influencing the stock are more or less in equilibrium. While our $379 price target offers 20% upside from current levels, we believe such upside is less interesting on a risk-adjusted basis. From a shorter-term trading perspective, we anticipate Tesla’s stock price may  reach highs in the range of $400 or more over the next few months before facing some more serious headwinds later in the year that could take the stock significantly below current levels.

While the upside forecast is hardly new for Jonas, the downside is certainly a headscratcher for the TSLA faithful, because if Musk is suddenly left without his biggest Wall Street fan, who else is left to drum up interest in a business model that would send PT Barnum in an orgasm of shivering delight.

And just in case there is some doubt about Jonas" sincerity, he provides the following five bullets to justify why even he has gotten cold feet:

1. It is our working assumption that Tesla’s battery module production bottlenecks may be resolved in weeks. It is not possible to prove precisely when problems with zone 2 will be overcome, if they ever are at all. There is only evidence that Tesla is throwing its human and financial capital at the problem. Elon Musk stated that it is better to be late and get it right than to be early and get it wrong. We agree. Tesla is trying to make battery packs with extremely high levels of volume and unprecedented automation with bespoke high-speed robotics. In high-volume battery manufacturing, robotics is a core competency and a competitive advantage.


2. We believe that Tesla baked in flexibility to allow for a highly unpredictable production ramp. Tesla’s Model launch timeline was always seen as extremely aggressive. When the July 2017 launch date was originally communicated to the market, we had seen it as a stretch goal and a form of supply chain management to increase the probability of a successful volume ramp in 2018. Given Tesla’s experience with the Model S and X launches and the unprecedented level of vertical integration and automation of the battery assembly, we believe Tesla had negotiated unusual levels of flexibility with its supply base compared to its prior launches and the industry standard.


3. The motivation of the Tier 1 and Tier 2 supplier base to be involved with the Model 3 project is a relevant factor in de-risking the ramp. It is our understanding that the Model 3 has been seen as a ‘trophy contract’ for the supply base. For any Tier 1 supplier wanting to be associated with the cutting edge of automotive technology (electric, autonomous) the Model 3 was a ‘must win.’ Tesla’s early success with Model S had a profound impact on its image in the supplier community. Where suppliers previously viewed Tesla with high degrees of  skepticism/trepidation, many of the same suppliers were willing to prioritize supply of key systems and even to colocate key production facilities near Tesla’s factory. We believe flexibility on working capital during the sensitive early ramp phase could have reasonably been a part of the negotiation process.


4. The Model 3 working capital arrangement may be highly favorable to Tesla, at least in the short term, during the inflection of the ramp… substantially alleviating concerns over near term liquidity. Like many auto OEMs, Tesla pays its suppliers over many weeks (as long as 60 to 90 days depending on the supplier) while it collects from its customers far faster, particularly given Tesla’s ownership of its distribution channel. Tesla’s own financials bear this out as it collects on its receivables 10 to 20x faster than it pays its suppliers. During times of fast production growth (as we’d expect through 1Q/2Q18), this can pull forward significant amounts of cash which can serve to address much of the market’s concerns over near-term liquidity.


5. Following a hypothetical 1H18 pop in the share price, we could see scope for longer-term risks in the story to come to the fore. The key drivers of our downgrade last May are 2-fold: (1) our view that the global addressable market may not be as accessible as the market expects, and (2) increasing encroachment from consumer electrics and mega-tech firms who are planning comprehensive strategies focused on shared, electric and autonomous transport systems in direct competition with Tesla. We expect a steady and increasing amount of evidence to hit the market as 2018 develops that could stunt the enthusiasm of surmounting the Model 3 production hurdles. Admittedly, we cannot be precise with the timing of positive (1H) and negative (2H) catalysts that could move the stock significantly in the quarters ahead, leaving us EW on the stock.

As a result of the above, Jonas now assumes only 1,000 Model 3 deliveries in 4Q, down from 10,000 deliveries previously. That said, he leaves his 2018 forecast of 120,000 Model 3  deliveries unchanged, and some more details: 

We took 2018 GAAP operating profit from ($688) to ($1,001). Our 2018 GAAP EPS (ex stock comp) estimates went from ($3.66) to ($6.17) and our US GAAP EPS estimate went from ($6.58) to ($9.00). From 2018 through 2020, our average GAAP OP forecast moved from positive $280mm to negative $70mm. From 2021 through 2025, our average GAAP OP forecast moved from $4,491 to $4,242…. A 5% cut. The cuts are even smaller in the out-years. Our Tesla Mobility forecasts remain unchanged. We roll forward our DCF start date to December 1st, and our price target remains unchanged at $379

As of this moment, investors appear just as confused about Tesla"s future as its former biggest fanboy, located almost exactly halfway betwen the two stated extremes...

Tesla Is The World's 4th Largest Automaker (Despite Only Selling 76,000 Cars In 2016)

It’s been another breakout year for Tesla. Over the course of 2017, the company’s market capitalization has soared beyond those of major manufacturers like Ford, GM, BMW, Honda, and Nissan. This thrust can be partly attributed to the company’s Model S, which reigns supreme as the top-selling plug-in electric car worldwide in 2015 and 2016.

But, as Visual Capitalist"s Jeff Desjardins notes, more importantly for Tesla, this massive momentum is based on the company’s much-anticipated future performance. Investors and analysts eagerly anticipate progress as the company ramps up production of the more affordable Model 3, and many also strongly believe that Elon Musk brings an “X Factor” that could translate into future returns.

In today’s charts, we look at Tesla’s ascent in valuation to become the #4 ranked automaker globally, and also the #1 maker in America. We also show why the value assigned to Tesla’s astonishing valuation may be premature, at least based on conventional metrics.

TESLA’S RAPID ASCENT

In the opening months of 2013, Tesla was just starting to plan deliveries for its Model S. At the time, the company was worth a mere $3.9 billion – just 7% of the value of Ford.

Since then, Tesla’s value has skyrocketed to make it the most valued auto company in North America:

Despite only producing 76,230 vehicles in 2016, Tesla is now the biggest of the “Big 3” – and this puts a lot of pressure on the company to live up to the vast expectations held by investors and media.

THE SPECULATOR’S GAMBIT

With so much hype and value assigned to expectations of future performance, Tesla and its enthusiastic investors are in a potentially tough spot.

Even though it is the most valued car company in the United States, Tesla is much less impressive by more conventional metrics:

The company has just a fraction of the employees, vehicle deliveries, and revenue of its competitors. Tesla also treads a similar path to Amazon, in that it will likely take a while for the company to ever post a profit.

Here’s another look, this time showing Tesla’s metrics as a percentage of GM’s:

Tesla is producing less than 1% as many cars as GM, but is worth more in market value.

That’s not to say that Tesla will not ultimately live up to expectations – but it does put into perspective the risk of banking on these future returns.

Tesla Ignores Q2 Record Cash Burn And Slashes Its Model X And Model S Prices

So what do you do when you"ve just burned through a record $1.2 billion of cash in one quarter, expect to burn an additional $2 billion in capex in the second half of the year and haven"t a prayer of generating positive earnings at any point in the near future?  Well, you slash your product prices, of course.

Apparently this is exactly the strategy that Elon Musk has decided to pursue with his Model X after quietly slashing its price tag from $82,500 to a far more affordable $79,500 last night.  Tesla explained the price cut via the following statement:

“When we launched Model X 75D, it had a low gross margin. As we’ve achieved efficiencies, we are able to lower the price and pass along more value to our customers.”

But it wasn"t just the base MSRP on the Model X that got a price cut, as electrek points out, Tesla also decided to cut prices on the their Model S and throw in their $5,000 premium package for free.

All dual Motor Model S vehicles also got a slight $1,500 price drop, but the Model S P100D and Model X P100D were the most affected by last night’s changes.

Tesla updated the options of the vehicles to add more premium features as standards.

The “$5,000” Premium Package is now being absorbed into standard features for top versions of Tesla’s vehicles. Here’s the Premium package and the new standard features on a Model S P100D:

Of course, as we recently pointed out in our review of Tesla"s 2Q 2017 earnings, this is probably the exact right move for a company burning through roughly $13 million in cash every single day.  Here are some of the highlights from our recent earnings review:

One month after Tesla stock tumbled when the electric car maker announced that it had missed Wall Street estimates for the second quarter, delivering only 22,000 vehicles instead of the 22,912 expected, moments ago Tesla reported adjusted, non-GAAP Q2 earnings which beat expectations, with an adjusted loss of $1.33, better than the -$1.88 expected, which curiously was identical to the -1.33 loss in Q1.

Tesla continued to burn cash, and in the second quarter it outdid not only itself but Netflix too, with a record cash burn of -$1.16 billion - or roughly $13 million per day - almost double what it burned in Q1. In Q3, Tesla"s CapEx was $959 million, a number which is set to surge as the Model 3 launch continued well into into Q3: Tesla expects it will burn another $2 billion in CapEx in the second half.

Understandably, the cash burning behemoth was proud to announce that it had more than $3 billion in cash on hand at the end of Q2. There is just one problem, and this wasn"t announced in the letter: Tesla also $3.9 billion in accounts payable and accrued liabilities, as the company drains all net working capital sources of cash it can find. Meanwhile, accounts receivable actually declined. This was the first quarter in which paybales and accrued were nearly $1 billion more than cash and equivalents!

All that said, Tesla investors don"t really seem to care about cash burn.  And, since lower prices will undoubtedly result in a couple extra sales throughout the year, albeit at a cash loss, we"re quite certain that investors will applaud this latest move by Musk...genius if we understand it correctly.

FANG Falters As Best-Performing Tech Fund Manager Warns "When Things Are This Elevated, It's Best To Be Cautious"

Joshua K. Spencer has managed his T. Rowe Price Global Technology Fund to become the best-performing mutual fund in the past five years with big bets on Amazon and Tesla is now selling some big winners... and it"s sending FANTASY stocks lower...

FANG stocks are rolling over...

And FANTASIA (Facebook, Amazon, Netflix, Tesla, Alphabet, SalesForce, Intel, and Apple) stocks are falling back from their 50% retracement...

But as MarketWatch notes, the fund manager is careful to hedge, pointing out that the decision to sell a company’s shares doesn’t mean Spencer has soured on the business or strategy. In fact, he expressed great confidence in Tesla’s long-term success.

“When sentiment lifts, that is when we usually take money off the table. That is hard to do. It feels bad to sell when stocks do well,” Spencer said.

“I have learned from experience that it is difficult to predict what will drive a stock down, but when things are elevated, it is best to be cautious,” Spencer said.

Over the past two months, he has been holding more cash than before as he reduces or eliminates positions in “more extreme winners.”

Additionally, Morgan Stanley sees more downside, but is also careful to hedge that eventually you buy the dip...

The sharp sell-off in Technology stocks on June 9th saw some follow through last week with a rotation toward some of the most unfavored areas of the market, including Energy. 

We think this could continue for a few more days/weeks but will not lead to a serious decline in Technology stocks or the broader market given a strong earnings backdrop, low interest rates and loose financial conditions.