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Trading  | November 21, 2017

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…

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