Morgan Stanley Has Had Enough, Slashes Tesla Price Target To $291 From $376

In a world in which Elon Musk found himself with increasingly fewer friends, one thing was certain: Morgan Stanley analyst Adam Jonas, always eager for that lead left spot in the next Tesla convertible, would stick with Tesla and Musk through thick and thin, no matter what.

Well, that ended this morning when Jonas appears to have had enough, slashing his price target on the car maker from $376 to $291, stating that following 1Q18 results, he is making significant cuts to his near-term and long-term auto margin forecasts, while forecasting greater equity dilution, i.e. another stock offering. Jones now sees "Tesla as trading near fair value with a balanced risk-reward."

Jonas starts by commenting on the now legendary - and bizarre - Tesla Q1 conference call, saying that "regarding the feedback from the 1Q18 conference call… Elon Musk reserves the right to do very difficult things that could yield great commercial value long term. At the same time, investors reserve the right to understand the costs and the risks near term."

Nonetheless, Jonas appears ready to brush aside the public outcry following the call saying that "we believe any impact on the investor engagement side is fairly limited and the market will focus on more pertinent and quantifiable debates such as the interplay between cash consumption and capital raising."

He does, however, focus on the "recent increase in the pace of management departures and an apparent reorganization of the business suggest to us the need to address some of the technical and fundamental hurdles weighing on company margins."

Going back to the reasons for the earnings forecast cut, Jonas notes that this was "driven by margins" (no punt intended) and adds:

While 1Q18 results were broadly in line with consensus expectations (and slightly above our forecasts), we are making material reductions to our earnings estimates to reflect lingering manufacturing issues with the Model 3 - most recently at Fremont final assembly. While our volume forecasts are largely unchanged, we have reduced our medium and long-term gross margin assumptions for Tesla’s passenger car operations. It is our view that the challenges in ramping up Model 3 production reflect fundamental issues of vehicle design, manufacturing process, and automation levels that can weigh against the profitability of the vehicle. The company has acknowledged that it, to some extent, overautomated the Model 3 production process and is now reengineering accordingly. Movements in raw material prices and FX add further headwinds vs. our prior expectations. Tesla management believes the Model 3's margin performance below its 25% target level will be temporary, whereas we believe this headwind is more structural.

Ominously, Jonas - who until now was the company's biggest cheerleader - says that given the execution risk reflected in current results, "an added level of caution is prudent" and explains:

  • We lowered our long-term auto gross margin forecast to 27% vs. 34% previously. We have assumed Model S gross margins of 35%, Model X at 31%, Model 3/Y at 24%, Roadster at 40% and ZEV credits at 100%.
  • We lowered our long-term operating margin forecast to 9.8% from 14.3% previously. This change takes our long-term view of group OP margins from best in class premium levels to margins in line with that of the German premium names or recent GM N. American margins. Of this reduction in long-term margin forecasts, 200bps is driven by the above concerns regarding automation, 200 bps is driven by FX (given the stronger dollar and Tesla's US based production), and 100bps is driven by raw mats.
  • The changes in our Auto margin forecasts drive nearly 90% of our price target reduction to $291.
  • We have delayed our forecast of the launch of Tesla Mobility (or Tesla Network/mobility as a service) by roughly 1 year, to the middle of 2019. This change contributed around $7 to our price target reduction. We now forecast 2k units fleeted in 2019 ramping to over 50k by 2021, 1 million by 2027 and 1.7 million by 2030.
  • Additionally, we have increased our estimate for Tesla’s capital raising from $2.5bn to $3.0bn, which we continue to expect in 3Q18. We assume 50% of proceeds are used to pay down debt.
  • We continue to value Tesla Energy at $0.
  • Lowering our bull case 21% to $441 (vs. $561 previously) and our bear case 45% to $97 (vs. $175 previously). Our bear case moves proportionally more than the bear case reflecting the great amount of financial leverage versus previous periods and the fact that we continue to ascribe zero value for TSLA Energy/SCTY.

Jonas summarizes the major concern facing Tesla as follows:

In our view, the number one issue at the heart of the Tesla investment debate is whether the company is 1) currently operating at a low level of utilization of a very large industrial complex, where incremental revenue can bring large incremental gross margins and improvement of cash consumption, or 2) the next 50-100% of growth in revenue brings forth other calls on cash and does not materially move the company in the direction of a fully self-funding existence.

With all that said, Jonas then cuts the umbilical cord connecting him to Musk and also cuts his price target to $291 from $376, for the following reason:

We see Tesla as trading near fair value with a balanced risk reward, and believe that is subject to extremely high
levels of fundamental execution risk, market/funding risk, and a highly volatile share price. In our view, Tesla does not offer enough upside to justify an OW rating or enough downside to justify an UW rating.

More concerning to Tesla bulls, Morgan Stanley sees the "bear" case price at just $97 now, down from $175, and a level that would trigger a full-blown margin call on Musk's stock-backed loans.

And here is Jonas' latest income statement projection, which now sees the company having a net loss in 2020:

An amusing aside: asking a rhetorical question, why he didn't simply cut TSLA to sell, the formerly fawning analyst gives the following meandering and meaningless explanation (the real reason, of course, is that Morgan Stanley would still like to be an underwriter on the upcoming stock sale):

Why not Underweight? With 3% downside to our revised price target and high levels of volatility, an investor could reasonably ask why we are not downgrading the stock to Underweight today. There are 3 primary reasons why we reiterate our Equal-weight at this time: (1) It is difficult to judge the true underlying profitability of the automotive operations until Model 3 production is ramped to a higher level and until current bottlenecks are surmounted. (2) We want more discovery around Tesla’s potential capital raising execution, including the instruments of capital (debt, equity, ABL facility, etc.), the genre (strategic or financial investor), size and, of course the price. (3) Potential strategic value – our $291 price target is driven by our DCF of the auto business and mobility as a service business. We believe there is significant potential strategic value within Tesla, including its invested capital, design, brand, technology, relationships with key stakeholders (suppliers, governments, commercial partners) and its people.

Still, the message is clear: Tesla has just lost its biggest fan on Wall Street, and as a result the TSLA stock is trading down 2.4% to $285 in the premarket on this "betrayal' by one of the company's - formerly - most prominent sellside friends.

Comments

jcaz buzzsaw99 Tue, 05/15/2018 - 07:48 Permalink

If MSN decides to run the pics of that Tesla melting down in Switzerland,  price target of $2.91 would be more accurate.......

Interesting that there is no mention of potential regulatory risks here- the Safety Board could shut down this shit show tomorrow until they solve the thermal runaway issue- which can't be solved..........

In reply to by buzzsaw99

mtl4 Last of the Mi… Tue, 05/15/2018 - 08:53 Permalink

Even if Tesla immediately finds another solution to power storage that doesn't result in a crematorium upon impact this guy will end up like a model day Howard Hughes.  Too many grandiose ideas for the amount of cash he can actually generate to fund them all.

Some folks are gonna get hurt bad when this stock falls from the current sky high valuations.

In reply to by Last of the Mi…

Last of the Mi… mtl4 Tue, 05/15/2018 - 09:07 Permalink

Last summer I decided to replace the batter in my iphone 5. Amazon'd the battery and everything needed to do it. Thought I would try it and if it didn't work the phone was a write off anyway so why not. As it turned out the camera was a complete screw up and it didn't work but removing the battery was an extremely educational event in dealing with lithium batteries.

Any flexion or torsion of the battery while attempting to remove it immediately resulted in sparks. It's amazing how little it takes to get one of those things to start sparking and I absolutely cannot imagine riding around in a car with one of those things that cannot be neutralized immediately in the event of an accident. To say nothing of an extremely near sighted LIDAR system that openly admits it cannot stop the vehicle in time to avoid an accident.

How in the hell can anyone not see this as a lethal combination. I really wouldn't want one of the damn things in my driveway, to say nothing of the dumbass owner inside my home. I'm not sure these people would be able to understand anything about personal responsibility even to the point of respiring on their own without blaming someone else.

In reply to by mtl4

Custard the Dragon jcaz Tue, 05/15/2018 - 11:04 Permalink

Precisely. The lack of coverage from the Swiss accident and the lack of action from NHTSA show a willful blindness to the thermal runaway issue that is killing occupants and putting first responders and other motorists at significant risk. At some point, enough battery fires will force their hand, but how many must die first?

In reply to by jcaz

Give Me Some Truth Custard the Dragon Tue, 05/15/2018 - 12:20 Permalink

MSM “coverage” of all companies is NOT equal. Tesla is being supported because it is politically correct. If the stock and company crash, too many important and influential people and organizations would be exposed as frauds. Really, the whole man-made global warming hoax could be at risk. Once the masses start realizing they’ve been fed a pack of lies, no memes will be safe. (Which is why I think the company will be protected from such “exposure.”)

BTW, the “Assad gassed his own people” meme is also fraught with great peril if, by some miracle, it was definitively exposed as a hoax. The risk is that the masses start asking themselves, “What else have they lied about?” Or: Have they told us the truth about anything?

That is, certain lies are more important than others. The discovery of certain truths is too dangerous for the Powers that Be. The truth being exposed about Tesla, solar panels ...and what really happened in Douma  cannot be allowed to happen imo.

In reply to by Custard the Dragon

FringeImaginigs buzzsaw99 Tue, 05/15/2018 - 11:48 Permalink

From a 2010 rerun.  I'll take TSLA for 0....  which reads: ZERO.   And I respond: What's the real value of TSLA? 

Jonas and the other "analysts" have been stupid from the getgo, and continue to prove it every day.  I agree the new target of 291 is simply more silliness of the highest degree. It has already been beaten today alone.  If this isn't a short ride to zero then there never was one in the history of the world.  

In reply to by buzzsaw99

Give Me Some Truth nmewn Tue, 05/15/2018 - 12:31 Permalink

If my theory is correct, “someone” will buy their bonds and/or stocks. Tesla is the poster child for the much-hyped green, earth-saving commerce. For this reason, it is too politically important to be allowed to crash (pun unavoidable).

The wild card that might render my theory moot is all the lawsuits that will have to somehow be buried or otherwise discounted or dismissed. I mean can anyone really stop a trial lawyer who smells massive settlements in the air?

In reply to by nmewn

boostedhorse Tue, 05/15/2018 - 07:05 Permalink

AWWWW shit, downgraded to current price. The horror! What a gutsy call, I'm going to immediately act on it. Wait - how would I do that? Would that be a buy or sell?

RubberJohnny Tue, 05/15/2018 - 07:09 Permalink

We are all Jews now.

We walk in lock step with Trump and Bibi with the likes of dual passport holder Bolton demanding the North Koreans send their nukes to the United States or their will be no American guarantee of peace.

Having fun yet?

DingleBarryObummer RubberJohnny Tue, 05/15/2018 - 07:22 Permalink

Trump is creating the Saud, Israel, and USA axis of evil.  It's as if Trump is trying to sabotage the country just like Obama was.  Everything he does seems to perpetuate the shift of global power over to the east.

Now's he trying to throw china a bone or something, with the walkback on ZTE?  When Trump shot those Missiles off into Syria over the chocolate cake, it was a huge loss of face for Xi.  He left early/unscheduled the next morning.  He made an enemy that day.  This is not real estate development. You can't just bully and screw someone over and then move onto the next sucker.  He's stuck with the same handful of leaders.

Just slap on the tariffs, don't play games.  His presidency is almost halfway over, and it will take years to see the benefits of tariffs.  If he is unilaterally making these decisions, the next president (likely to be a globalist socialist because Trump is so full of shit) will just undo them.  This is all bullshit, and it's bad for us.

Israel is a cancer on the world.  I just hope it doesn't kill the host.  Trump will go full retard for Israel, that much is obvious.  He stated it repeatedly in his book, "Crippled America," which is Ironic, because America will be crippled after he's done with it.

Chinese World Order Rises in Ashes of Iran Deal - YouTube

In reply to by RubberJohnny

balz Tue, 05/15/2018 - 07:17 Permalink

Bear case should be base case. No way this company is going to make money in 2021. In fact, not sure this company will still exist in 2021.

MsCreant silverer Tue, 05/15/2018 - 08:34 Permalink

Mark to model, my model, because ".gov". (Brought to you by the Central Cranking System).

 

Crank- turn the crankshaft of (an internal combustion engine), typically in order to start the engine.

Crank- a fake.

Crank- the drug methamphetamine.

Crank- an eccentric person, especially one who is obsessed by a particular subject or theory.

Crank- a bad tempered person. 

 

In reply to by silverer