If there was one analyst you'd expect to swallow Elon Musk's perpetually rosy, if just as perpetually inaccurate, forecast about the future, it would be Morgan Stanley's Adam Jonas, who on numerous occasions has demonstrated his desire to become Tesla's most fawning Wall Street fanboy (it's ok Adam, we understand that Morgan Stanley has to be lead-left on Tesla's next stock/convert/junk bond/DIP Loan offering somehow).
And yet, in a note released overnight, Jonas, who a month ago showed a glimpse of his rebellious spirit when he said that "Tesla's Call Was The Most Unusual I Have Experienced In 20 Years", may have angered Tony Stark with a note that pretty much threw up all over Musk's latest set of rosy expectations delivered during the Tesla shareholder meeting (which were further complicated by a report that Tesla's new production robots are not even operational yet).
So what did Jonas have to say? Well, for one, it appears that the blue pill is wearing off, because his assessment of Musk's hyperoptimistic "narrative" is that it was "positive, but not a surprise", and was geared at one thing only: to force another short squeeze (which as we observed yesterday, was clearly achieved):
Tesla added $5bn in market cap following positive comments from Elon Musk at the annual general meeting on volume, profit and cash flow. We think the stock move reflects more on investor positioning (bearish) than truly incremental data on fundamentals (positive, but not a surprise?).
But what were Jonas' explicit disagreements with Musk? As the following list reveals, perhaps a better question is what he did not disagree with:
- 1. Model 3 volume. Mr. Musk says it is 'quite likely' that Tesla will achieve 5k Model 3 production per week by early July. Our 2Q'18 forecasts assume deliveries 2.5k/week (for 10 weeks, including a two-week shut-down) in 2Q, 2.8k/week in 3Q and 3.8k/week in 4Q. We do not expect a 5k/week run-rate of production before 1H19… over one year from now. Tesla's CEO is saying that it is likely the company can achieve 5k per week one year ahead of our expectations.
- 2. Profit. Elon Musk says he expects the company will likely achieve positive GAAP profit in 3Q'18. We currently forecast Tesla to post a GAAP net loss of $554mm. We do not forecast Tesla to achieve a positive GAAP operating profit until 2020, and we do not forecast a positive GAAP net profit until 2021.
- 3. Cash flow. Mr. Musk expects positive free cash flow in 2H'18. This is far more bullish than our forecast of $1.4bn adjusted free cash burn in 2H'18. We do not forecast Tesla to produce a positive free cash flow result until 2021.
- 4. Capital needs. Mr. Musk reiterated his statement that Tesla does not need outside capital. We currently forecast a $3bn equity raise in 3Q'18 at $280. Investors we have spoken with expect Tesla to be considering a variety of capital raising exercises, including equity, convert, securitizations and other exotic alternatives as well as other potential instruments and strategic sources of funds. If Tesla can get through 2018 without raising equity, it would represent a material upside surprise to investors.
- 5. China. Tesla said that it should announce a combined gigafactory and vehicle assembly plant near Shanghai very soon. While we are prepared for an announcement on Chinese capacity additions, our view is that Tesla's ability to access the Chinese shared autonomous transport market will be limited by data privacy and national security issues. We hold this view for all US auto companies participating in the Chinese market.
- 6. Mix. Tesla is prioritizing higher-mix configurations of the Model 3, including a $78,000 performance version. We have modeled an average transaction price of just under $51k this year. If Tesla is able to achieve an ATP of say $60k in 2018, this would represent an incremental $1bn of revenue. Rule of thumb on mix in the auto industry is that incremental revenue from trim and accessory levels delivers a 50% variable margin… potentially suggesting that a significant surprise on mix could yield an incremental $500mm to profit this year on our full year Model 3 unit volume forecast. This all-else-equal calculation is made before considering potential cannibalization from Model S and X.
Still, there was some of the old Jonas left, and as he summarizes, "if Tesla were able to achieve 5k of weekly production of Model 3 and avoid a significantly dilutive or expensive capital raise, it could trigger a continued squeeze in the name."
It was also the "old Jonas" who kept his Tesla price target unchanged:
Reiterate Equal-Weight. Our PT of $291 is comprised of 2 components: The first is a $196/share DCF value of the core Tesla Auto business on a 13% WACC, 10x exit EBITDA and exit EBIT margins of 9.8%. The second component is our valuation of Tesla Mobility at $95/share (what the company has announced as 'Tesla Network') based on a DCF to 2030 and a 13% WACC. Our price target applies zero value for Tesla Energy and zero value for SCTY.
Even so, the new and more bold Jonas is becoming increasingly vocal, and warns that "longer-term strategic and competitive issues remain" and concludes that "Tesla is trading slightly above fair value and would recommend investors prepare for volatility."
Finally, there is the question of addressable markets. As Barclays showed two weeks ago, Musk's admission that the $30K price point is a cash burn loss leader for Tesla was bad news, because unfortunately that's where the bulk of cars sold are. If Tesla persists in selling only cars costing $50K and higher - the sweet zone where it actually does generate cash - then Musk will have a major problem.