It seemed like it was just yesterday that Morgan Stanley was enlightening us with their $10 to $500 price target range for Tesla. Yet here we stand, just weeks later and on the back end of a massive Tesla short squeeze that has seen shares run from the mid $300 level to as high as $537 in just a month. And at this nearly $100 billion valuation, which almost made Tesla bigger than the world's biggest autocompany, Volkswagen, even MS' Adam Jonas has seen enough.
In a note on Thursday morning, the Morgan Stanley auto analyst downgraded Tesla to "Sell" based on valuation, unfavorable risk-reward and risks to the long-term Chinese business that may not be "fully appreciated by the market". Ironically, he hiked his price target from $250 to $360, and in the new note, he updated his $490 spread "valuation cone" to show his new target of $360. The spread of potential valuations has widened from a laughable $490 to an outright ridiculous $535 ($115-$650). Which, probably, is why analysts get paid the big bucks.
As a result of the new probability cone, Tesla is now the "3rd least attractive company in its entire coverage"
Jonas commented in his note: "Near-term momentum and sentiment around the stock is admittedly very strong, but we ultimately question the sustainability of the momentum. We believe the current share price discounts a fully ramped up China, Berlin and Model Y."
Jonas says that at $520, Tesla stock is "very close to pricing in our bull case assumptions". He claims that "investors will be presented with more attractive opportunities to own the stock in the future".
He also claims an unfavorable risk-reward, offering a reality check that is years overdue, and decreasing his expectations for the company's mobility business, which had acted as the foundation for many a absurd price targets of days past. It's almost as though Jonas recognizes that Tesla is a car business and not a SaaS business.
He attributes the increase in auto volume to China, but then notes that the risks overseas are "not fully appreciated". Jonas reminds the world of the ongoing recession in the auto market and compares Tesla to GM China, which it values with a mid single digit PE.
There was the obligatory "this has to be a typo" chart...
And so on. It will be curious to see what happens when Jonas figures out that the rest of the business should also be valued at a mid-single digit PE. It's car company, Adam - they make, and sell, cars.
Today's downgrade comes after a report stating that Tesla once again is likely the most shorted stock on the U.S. stock market. Investors have bet $14.5 billion against Tesla shares, according to S3 Partners.
And a second ray of hope for all those shorts, a report from Dominion Cross-Sell, , which collates data from state motor vehicle records, found that Tesla's overall vehicle registrations dropped by almost 50% in the U.S. state of California during the fourth quarter.
The report released on Wednesday showed registrations in California, a bellwether market for the electric-car maker, plummeted 46.5% to 13,584 in the quarter ended December 2019, from 25,402 in the same period a year earlier. Model 3 registrations, which accounted for about three-fourth of the total, halved to 10,694.
The massive drop comes as tax credit for Tesla buyers ended in 2019. It had fallen to $3,750 at the start of the year and had halved to $1,875 in July. An existing $7,500 U.S. tax credit for electric vehicles (EVs), which allows taxpayers to deduct a part of the cost of buying an electric car, phases out over 15 months once an automaker hits 200,000 cumulative EV sales, which Tesla hit in July 2018.
“One can assume that Tesla has hit peak performance in the U.S. because they have not exceeded their 2018 results for five months now,” said Shane Marcum, vice-president of Cross-Sell.