Morgan Stanley: Tesla's Next 5 Phases

Tesla Inc (NASDAQ: TSLA)’s volatile price may be hard to pin down. One analyst pair linked it Tuesday to five fluid factors that, depending on circumstances, could swing shares between $97 and $441.

The Analyst 

Morgan Stanley analysts Adam Jonas and Armintas Sinkevicius maintained an Equal-weight rating on Tesla with a $291 price target.

The Thesis

As the analysts see it, Tesla shares could oscillate throug five near-term phases.

In the first, the Model 3 ramp drives free cash flow from negative working capital, with high product mix and reduction of one-off costs supporting strong gross margins. This phase, projected for the third or fourth quarter, is seen to spur positive GAAP profit in the second half, Jonas and Sinkevicius said. 

The second stage, which could occur between the fourth quarter and the first of 2019, brings a forecasted $2.5-billion equity raise from strategic sources.

Stage three — sometime between the first and second quarters of next year — marks a deceleration of Model 3 production and a drop in cash flow. Tesla pays off its suppliers and, at the same time, suffers significant cash burn, if Morgan Stanley's model proves correct. 

“Tesla’s positive free cash flow could flip to a free cash burn that may match or potentially exceed what the company experienced in 2017 and early 2018,” Jonas and Sinkevicius said. 

In the fourth step, competing products begin to take market share and demand deteriorates for Models 3, S and X. The decline, predicted for the second and third quarters of 2019, would exacerbate cash burn.

Finally, Morgan Stanley expects a “potential resolution” in the third or fourth quarters of 2019.

“Tesla potentially crystallizes strategic value with a partner that can fund the ongoing capital requirements of the auto business or can monetize the value of Tesla’s edge compute/machine learning ecosystem,” the analysts said. “ ... Tesla has significant strategic value that we believe can be crystalized in ways that may challenge traditional stand-alone DCF or comparable multiple based techniques.”

They anticipate Tesla’s standalone status to be challenged by competition as well as economic, regulatory, political and technological factors. How this plays out for shareholders, though, remains unknown.

Price Action

Tesla shares were trading up more than 1 percent at $297.84 off the open Tuesday. 

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