The last time Morgan Stanley made a mockery of Reg-S, was in February 2014 when a day before Tesla announced a $1.6 billion convertible offering Morgan Stanley's Adam Jonas raised his PT on TSLA from $153 to $320 [14], sending the stock soaring and assuring far less convertible dilution on the day of pricing. Fast forward 1.5 years when Tesla, having burned through most of this cash (in fact it burned over $1 billion in just the first 6 months of the year), Tesla announced it would sell $500 million in a follow-on stock offering (subsequently upsized).
We were modestly surprised [15]that Adam Jonas did not upgrade the stock just before the equity offering as he did last time. We said the following:
And if there is a reason why Morgan Stanley did not upgrade the stock with a $320 price target yesterday as it did back in 2014 the day before it issued a convertible offering for TSLA, is that this time the lead left is Goldman, not MS: "Goldman, Sachs & Co. and Morgan Stanley are acting as lead joint book-running managers for the offering, J.P. Morgan and Deutsche Bank Securities are acting as additional book-running managers for the offering, and BofA Merrill Lynch and Wells Fargo."
Moments ago, however, all our confusion was put to rest when Morgan Stanley did just as expected, only this time it at least followed protocol when it announced it is raising its price target on TSLA from $280 to a whopping $465, or just shy of $61 billion in implied market cap. Incidentally at this price TSLA would be the biggest US automaker, surpassing not only GM's $50bn in market capo, but also Ford's $60 billion.
[16]
And just to make sure the joke's not lost on anyone, Jonas decided to port over the traditionally exuberant Elon Mask hyperbole manifesting itself in the user of Greek-prefixes such as mega, giga and hyper, into his own report as follows:
Raising our Tesla price target to $465 from $280 to reflect the potential for Tesla to lead the revolution of the shared mobility public transportation hyper-structure and more confidence around the commercial viability of Tesla Energy. Our new price target of $465 represents the midpoint of our new base ($319) and bull case ($611) valuation to reflect our view that while a mobility app is likely to be announced within 12-18 months, there is a degree of uncertainty as to if, when and how this product unfolds.
Here are the full highlights from the note:
Ten trillion vehicle miles are driven annually. Firms with expertise in autonomous tech and networked machine learning can exploit the inefficiencies in the current model. TSLA may be uniquely positioned to dominate. Our PT rises to reflect its potential to lead the revolution in shared mobility.
The race to capture the 10 trillion. Which firms can capture the most miles and at what price? Today, nearly 100% of these miles are delivered by companies practicing a 100-year-old business model of human-driven, privately owned, internal-combustion vehicles. This is fundamentally changing. In fact, the shared mobility model, i.e., shared transport empowered by smart technology, is significantly enhanced by autonomous cars, enabling higher vehicle utilization. Higher utilization overcomes the poor payback economics of electric vehicles (EVs). Reinforcing this is our view that EVs should work better in an autonomous, shared model.
'Introducing' Tesla Mobility, an app-based, on-demand mobility service. Given the pace of technological development both within Tesla and at rival technology and mobility companies, we would be surprised if Tesla did not share formalized business plans on shared mobility within the next 12 to 18 months. This could potentially be followed by commercial introduction in 2018, shortly after the launch of the Model 3, which we think could form the backbone of a possible Tesla Mobility 1.0 urban transport PODS (Position on Demand Service) in 2018. We view this business opportunity as potentially additive to Tesla's existing model of selling human-driven cars to private owners and see potential for this model to conceivably more than triple the company's potential revenues by 2029. That is, selling miles in addition to selling cars.
Why is Tesla well positioned in Shared Mobility? If Tesla wants to make good on its mission to accelerate the world's transition to sustainable transport, we see the move to a shared mobility model as critical. Tesla has been the most outspoken auto company on the use of autonomous technology to improve inefficiencies and safety of today's road transport. 100% of Tesla's cars are electric, connected, and able to “learn” through overthe- air firmware updates at any time. No other established automaker can claim this today. As we have written for some time, we expect all car companies would eventually see nearly 100% of their revenues shift from the sale of human-driven/individually-owned cars to robot-driven/shared cars. In addition, Tesla is developing a vast proprietary, company-owned charging and service infrastructure – ostensibly to service its current product offering, but well positioned for fleet management in a shared mobility model. These are early days, but it is the view of the Morgan Stanley global auto team that Tesla may be best positioned to advance the state of the art in shared autonomy.
Huh? And how does this affect Tesla?
Why Tesla?
Why now? Tesla is introducing a suite of sensor and software capabilities in the Model X (due next month), which we believe could set a new industry standard for driver-replacement technologies that could eventually find their way into high-utilization shared mobility models. As the market contemplates the capabilities of this product, more attention should turn to the introduction of the Model 3 (expected to unveil in 1Q16, launch in 2017). While the Model 3 is slated to launch as a traditional “I own it, I drive it” vehicle, we expect a new application could follow within a year. Tesla's pace of capex and R&D spending through 2020 vastly exceeds its current size and production footprint. We have modeled $14bn of combined spending from 2015 through 2020, for only 2 model families (Model S/X and Model 3), 1 assembly factory, and 1 very large battery factory. On a per-unit basis, this level of spending is nearly 10x that of Ford. Taking together the spending levels, technical expertise, and ambitions of the company, we believe investors can reasonably expect the company to be taking its product offering in a new direction. Adding to the sense of urgency that a Tesla Mobility model could perhaps come sooner than later is the acceleration of new tech rivals encroaching in the area of shared, electric, autonomous mobility (SHEAM). We have written extensively on efforts by Google, Apple, and Uber to get in on the action. Tesla is in a battle for talent, capital, first-mover advantage, and cooperation with local governments and municipalities on a variety of mobility initiatives. And Tesla is not alone.
How might the market value Tesla Mobility? A hallmark of a great product or service is if it is substantially cheaper or better than the prevailing alternatives. When contemplating a shared autonomy service, we think it can offer consumers both a superior value and experience versus the current model. Our simulations of the unit economics (drawing on our experience from the auto, taxi, and rental car industries) also suggest a potentially profitable, cash-generative business with substantially less cyclicality than the prevailing auto/credit cycle. An autonomous car, efficiently utilized (sharing model) can do a lot of work at a low cost and provide a high return. The shared mobility model should in many ways resemble today's car rental model but would likely be driven by number of miles, revenue/mile fleet, capital costs (leasing/financing), and direct fleet operating expenses (maintenance, electricity, network, fees, etc). Today's mobility models such as car rental and airlines trade at valuations ranging from 12x to 20x earnings. We expect the market could plausibly value Tesla Mobility by making assumptions about Tesla's share of global miles traveled, and revenues and costs (through at least 2025 or 2030), to which it would apply exit valuation assumptions before discounting the forecasted cash flows back at an appropriate discount rate.
In short, another "story" for the Tesla faithful to digest and throw their money at. And why not: the stock is up $12 already and likely will surge even more as insiders and big holders dump into what are inreasingly more desperate atttempts to sucker in the last money into what is clearly becoming nothing but non-GAAP hype.
