Adam Jonas, CFA – Morgan Stanley
May 15, 2018 4:01 AM GMT
Following 1Q18 results, we are making significant cuts to our near-term and long-term auto margin forecasts and allow for marginally greater equity dilution. We see Tesla as trading near fair value with a balanced risk-reward. We remain EW.
Regarding the feedback from the 1Q18 conference call… Elon Musk reserves the right to do very difficult things that could yield great commercial value long term. At the same time, investors reserve the right to understand the costs and the risks near term. We believe any impact on the investor engagement side is fairly limited and the market will focus on more pertinent and quantifiable debates such as the interplay between cash consumption and capital raising. A recent increase in the pace of management departures and an apparent reorganization of the business suggest to us the need to address some of the technical and fundamental hurdles weighing on company margins. Lowering our earnings forecast - driven by margins. While 1Q18 results were broadly in line with consensus expectations (and slightly above our forecasts), we are making material reductions to our earnings estimates to reflect lingering manufacturing issues with the Model 3 - most recently at Fremont final assembly. While our volume forecasts are largely unchanged, we have reduced our medium and long-term gross margin assumptions for Tesla’s passenger car operations. It is our view that the challenges in ramping up Model 3 production reflect fundamental issues of vehicle design, manufacturing process, and automation levels that can weigh against the profitability of the vehicle. The company has acknowledged that it, to some extent, overautomated the Model 3 production process and is now reengineering accordingly. Movements in raw material prices and FX add further headwinds vs. our prior expectations. Tesla management believes the Model 3's margin performance below its 25% target level will be temporary, whereas we believe this headwind is more structural. Given....
I never understand the word "short term investment", all short terms are speculation, not saying they are bad, just they are not investment. So expect speculator's result.
Any one who invests in Tesla should look at it as a long term investment. Where it will get to, how likely. Discount it back to today based on the possibility.
These investment banks naturally focus shorter term. You can see this based on how much they focus on quarterly results, their questions during CC, and they frequently give price targets for 6 months or 12 months. I don't know why they focus so much on one year target if the investment is for long term.
Jonas does have a long term view on Tesla, I don't think he views Tesla or Elon as anything special compared with other companies. He maybe right, maybe wrong. A lot of my long term view is based on Elon and Tesla's capability and determination, and what they achieved in the past.
Here is my view:
The society is transitioning to 100% EV, the transition will gain speed in the next 2 years. Model 3 and Model Y will lead the transition. EVs make so much sense especially that they are reaching the cost parity with ICEs, and EVs are continuously improving at high speed. They will soon cost less than comparable ICEs.
Today VW, Toyota, GM each can take 12% of the ICE market, tomorrow, I see Tesla to take 12~20% of the EV market, which will be 80~90 million a year. So Tesla will be producing 10~18 million cars a year in long term.
In the long run, Tesla's business model (no dealers, no ads, owns charging stations, selling software and services) will allow 25% gross margin, 15% net earnings. On car alone, Tesla will have $100B gross margin a year. Not counting Tesla network and Tesla energy, which Tesla is determined to lead.
I would not be surprised that in 10~15 years Tesla will reach $150B gross margin, and $80~100B net earnings per year. I do see a clear path how Tesla will become a trillion dollar company based on earnings.
Jonas keeps saying why Tesla should/need to get a few more billion dollars from the market. Maybe he doesn't understand that Elon views the stock as very undervalued and doesn't want to dilute. Elon won't do it unless the Model 3 production somehow falters.
Some large investors are onboard with Elon. They will continue to acquire shares from the open market. This creates a high possibility of a short squeeze. Short squeeze is not in my valuation calculation. It does add a lot if I add that into consideration.
