The Unnerving Sound of Tesla Bulls Growling Like Bears

(Bloomberg Opinion) -- Morgan Stanley hosted a private investor call about Tesla Inc. on Wednesday that was like a scene from a David Cronenberg movie. A long, disturbing single take of a bull not-quite-transforming into a bear, leaving us with something in-between, unnatural, chimeric.

Analyst Adam Jonas currently has a “hold” rating on Tesla’s stock but has long had a reputation as an enthusiast for the company, based in part on often bullish price-targets for the stock. On the investor call, however, the bearish tone was unmistakable:

Today, Tesla is not really seen as a growth story. It’s seen more as a distressed credit and restructuring story.

Jonas had been in the news the day before, having issued a report keeping his base-case $230 price target unchanged but slashing his bear case from $97 to $10 (Tesla is currently at about $193). In fact, several of the points he made on the call echoed things published already: concerns about demand, concerns about China and the trade war, the need to consider the proverbial strategic “alternatives.”

But the call, a recording of which was obtained by Bloomberg News, was overwhelmingly downbeat. Jonas reeled off a list of challenges ranging from the existential – “Even at a zero dollar equity value the enterprise value-to-sales ratio of Tesla would be 50% or so higher than VW” – to the seemingly mundane. At one point, he even dismissed those falcon-wing doors on the Model X, saying they “flap around like a bird,” and would need to be “completely re-engineered.” The wildest moment came toward the end, when he characterized 2016’s acquisition of SolarCity Corp. as a “controlled detonation,” done in order to protect the aura around Tesla from any damage from the spiraling fortunes of another vehicle linked to CEO Elon Musk.

There were still bullish flashes. In particular, Jonas praised Tesla’s technology, characterizing it as still out in front like a “white rabbit at the dog race” but bogged down by its bloated balance sheet, ultimately posing the sort of question we’ve all contemplated at one time or another, alone with our thoughts in the wee hours: “What is the white rabbit worth if you can’t get the rabbit? Right?” 

Jonas also mused on Tesla perhaps being acquired, although he sounded skeptical about recently revived talk of Apple Inc. swooping in. Instead, he sketched out a scenario whereby Musk might somehow borrow billions of dollars against his other, privately held business Space Exploration Technologies Corp., or SpaceX, and use that to cobble together a take-private deal for the electric-vehicle maker. Two things to note there. One, this would be no $420 deal, but sub-$200 by Jonas’ reckoning. Second, he called this his “fantasy case.”

The bits of the call that will linger, though, are those about the issue behind a slew of recent cuts to forecasts and price targets: demand. Asked what levers Tesla could pull to reverse the big drop in the first quarter, Jonas first dismissed the idea of using pricing but then segued into more existential territory, wondering aloud whether Tesla had already saturated current demand for electric vehicles. He even said we might look back and say that Tesla selling 200,000 Model 3s – it had sold roughly 219,000 in total through March – was a “phenomenal accomplishment.” Tesla’s guidance for this year is 360,000 to 400,000 vehicles in total.

The problem Jonas was getting at is that Tesla’s plant, payrolls and various obligations, both on and off the balance sheet, are sized for much more:

They’ve built this hulking physical infrastructure to supply more like a million cars a year, not 350,000 cars a year.

I think the electric-vehicle market is set to keep growing, but only in the context of Tesla’s rivals releasing more models to compete with it. The significance of Jonas’s comment is that Tesla needs demand to recover big-time, and quickly, from the first quarter’s wash-out. What we have witnessed so far this year is a demonstration of the tension between Tesla’s growth narrative on one hand and the underlying performance and financial foundation of the business on the other. That tension has been there for years, but becomes unbearable if growth falters.

One analyst’s take is, in the end, just one analyst’s take. Don’t forget, only a few years ago, Jonas also stunned the market by slapping a $465 target on Tesla’s stock, when it was trading at about $225 and long before $420 was even a twinkle in Musk’s eye.

But if the recent spike in Tesla’s bond yields hasn’t unnerved bulls, then hearing a Jonas emit such bearish growls must be unsettling. If nothing else, it throws a spotlight on an overlooked aspect of the recent sell-side retreat. For all the cuts, nine out of 30 price-targets tracked by Bloomberg still require Tesla’s stock to at least double within the next 12 months. The top target of $530, from New Street Research, requires a gain of 175 percent. That investor call may be the most shocking example of the sell-side pulling in its horns, but I doubt it will be the last.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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