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Former Tesla bull makes $10 worst case call on China worries

Published 05/21/2019, 02:05 PM
Updated 05/21/2019, 02:05 PM
© Reuters. Tesla electric cars are seen in the dealer's showroom in Oslo

© Reuters. Tesla electric cars are seen in the dealer's showroom in Oslo

By Tanvi Mehta and Vibhuti Sharma

(Reuters) - One of Tesla's former biggest supporters on Wall Street said on Tuesday the electric carmaker's shares could fall to $10 from nearly $200 now, if tensions with China escalate and sap demand for its cars.

Shares of Tesla (NASDAQ:TSLA) edged down, heading for their fifth straight session of losses, and bonds weakened, after Morgan Stanley (NYSE:MS) analyst Adam Jonas outlined his worst case scenario.

Jonas forecast the shares could be worth $10 to $391, with a price target of $230, a wide range that underscores the confusion and risks about Tesla's future.

The company is facing signs of dragging demand as rivals step up electric efforts, as well as issues related to cash flow and manufacturing, its outlook in China and its eccentric, charismatic Chief Executive Officer, Elon Musk.

"Tesla has grown too big relative to near-term demand, putting great strain on the fundamentals," wrote Jonas, rated a five-star analyst by Refinitiv for the accuracy of his forecasting on the company.

The company's stock, which has almost halved in value since last August, was down another 3% at $199. In the last 10 days, it has gained only once, when the company boosted prices of its Model 3 sedan last week.

It is building a factory in China to produce its Model 3 electric vehicles in the world's largest auto market and to escape a rise in tariffs on cars imported from the United States.

Another brokerage, Baird, cut its price target for the company to $340 from $400, saying concerns over demand, credibility and noise around the company have kept incremental buyers out of the market.

"The departure of key executives, price discounting, and extraordinary cost-cutting efforts add to the narrative of a company facing real potential stress," Morgan Stanley's Jonas said.

An early backer of Tesla, Jonas in 2011 set a price target of $70 on the stock when it was trading around $23, a year after its IPO at $17 apiece. In 2017, he said the Tesla Network alone, Musk's plan for a robotaxi fleet, was worth $76 a share.

His bear case doesn't ascribe any value to robocabs but if the plan works, Jonas, who was once criticized in a New York Times article for being a cheerleader for Tesla, has a bull-case price target of $391.

The market action follows hot on the heels of a $2.7 billion fundraising round by the company two weeks ago that was oversubscribed, but has done little to settle the nerves of holders of Tesla's existing debt.

Its $1.8 billion high-yield bond due in 2025 with a 5.3% coupon weakened for a third straight day in European trading, with its price edging below 82 cents on the dollar and the yield up to 9.16% after touching a record high 9.25% overnight.

The spread of its yield over Treasury securities, a gauge of the added compensation demanded by investors for holding Tesla rather than safer government debt, widened to nearly 693 basis points.

By comparison, the average spread on corporate bonds rated "B" - roughly the same as "B-" rated Tesla - is 442 basis points, according to ICE (NYSE:ICE) BofAML bond index data.

It was also among Wall Street's more heavily shorted stocks, with about a fifth of its float on the line.

"FAANG stocks continue to dominate the list of most shorted U.S. equities ... but Tesla continues to hold the number 1 or number 2 spot since 2016," according to financial technology and analytics firm S3 Partners.

Of 31 analysts who cover the stock, 10 now recommend buying Tesla shares, nine are neutral and 12 recommend selling, according to Refinitiv Eikon data. The median price target is $250.19, a fifth above the current market.

© Reuters. Tesla electric cars are seen in the dealer's showroom in Oslo

While cutting their price target, Baird analysts reiterated their outperform rating, saying Tesla was "positioned to outperform over the long run, as it increases profitability, generates free cash flow and ramps up production of innovating products".

Latest comments

Adam jonas of Morgan Stanley has no idea. obviously he is trying to manipulate the stock downward so he can buy back cheaply. if Tesla went to even $20 I will sell my home and car and put all my life savings into Tesla. Tesla has more value to humanity than Facebook. Facebook is built on a stack of cards. The user numbers of Facebook are fictitious on which the advertising revenue are built on. Tesla builds real cars. That drive themselves.
Morgan Standley does not know about investing. They are wrong 90% of the time.
that is why they are profitable 99% of the time trading.. when people talk without ch6 facts it sad.
I've noticed an abundance of used model 3's on Cars.com. There are a lot of shareholders who now wish they sold at 360 but were fooled by Management into keeping this issue. when a car has a 50% or less residual value when purchased one should understand it's an unbankable bad purchase. the fan boys and gail's have bailed. The remaining are suckers. The Tesla automobile has seen it best days. now that China has dissected the Tesla there is major Chinese competition, what more needs to be said about that market for Tesla. GM the world's largest and Toyota have no major plans to take on this rock. Let's review Tesla great idea, market saturation, no discount, equals fewer sales equals less profit equals less value to the shareholders or potential new investors.
All sounds real astute Larry, but what mass prduced non-classic car doesn't eventually depreciate to zero? And as it relates to Tesla classics, have you checked cars.com for the price of an original Roadster which is vastly inferior to said used Model 3s? Wannabe-nouveau-riche-tax-credit-scammers don't necessarily speak to false demand. Just the byproduct of buyer's remorse fallout when you make a car as easy to purchase as Amazon with the Millennial and Z generations. Furthermore, the cars don't lose all their value, there just isn't a large secondary tune/service/repair aftermarket, yet. Give it time: it's already on the way.
That's curve fitting, Larry. Teslas actually depreciate much slower than comparable cars, firstly. Secondly, it's an open secret that there are a subset of buyers who purchased only to cash in on the tax credit. Yes, that may have inflated demand to some extent, but not to where sales are going to fall off a cliff. No one buys a $50k+ car only because they can get a $3750-$7500 rebate.
actually the worst case scenario would be $0, as is true for any stock, this is just some attention whoring by Morgan Stanley
Jones's slimy intention is to buy the stock at the lowest level. Analysts are not to be trusted.
I know! Every time I buy a stock that says strong buy, accumulate, etc. It's a dud. Stocks that have sell, reduce, stay away from gain more.
if Tesla's stock were to get down to 10, why would it stop there? a 10 bear Target makes absolutely no sense.
Exactly. Might as well say it is worth 0. Rubbish analysis. LOLz
visionary ? yes! Competence in manufacturing but more importantly distribution and marketing... INEPT
I smell conveniently timed take down by these analysts. Guaranteed they're buying all the shares that are being dumped right now. Tesla's software, IP, and vertical manufacturing stack could never devalue to $10. Pure weak hand shake out. They literally just bought a battery company--with a mfg process edge--literally today worth $200M+. Banks just trying to squeeze the juice out of their shorts set to expire while simultaneously optimizing their long entries. What a joke.
Ironic coming from a guy with your last name.
Prepare for the worst.
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