“The Great Tesla Re-Rating” - Morgan Stanley Ups TSLA Price Targets

Rob Maurer

Prior to market open on Tuesday, Morgan Stanley released an updated note on (TSLA) -Get Report, increasing base case and bull case price targets. The title of the note reads, "The Great Re-Rating: Tesla PT to $740, Bull case to $2,070". Previously, Morgan Stanley's base case price target was $650 while the bull case price target was $1,200.

The new bull case price target follows a similar increase from Wedbush analyst Dan Ives who issued a $2,000 bull case price target late last week.

Morgan Stanley analyst Adam Jonas noted an improved outlook on Tesla's Q2 delivery and production report and posed the question, "what have we learned that is truly thesis changing over the past week?" In general, Jonas answers the question with these ideas:

  • Q2 production and demand ahead of expectations
  • Differentiation from other automakers, saying “demand is holding up better”
  • Top line resiliency in deliveries and revenue may lead to a stronger balance sheet

Jonas notes that while other automakers are burning billions in free cash flow for the first half of the year, Tesla is likely to perform better.

"As investors mark to market the top line resiliency, they may also find that the company’s balance sheet is holding up better than most auto competitors, many of whom may experience double digit billions of negative free cash burns in 2Q and significantly expanded net debt balances. Tesla, on the other hand, may see some cash consumption from working capital, but is in position to post an above break-even US GAAP result in 2Q. In both absolute and relative terms, Tesla appears ready to impress the Street for 2Q." - Adam Jonas, Morgan Stanley

Still, Jonas is forecasting Tesla's free cash flow to be negative $1 billion dollars for the second quarter. Tesla has a significant cash tailwind this quarter due to delivering 8,000+ more vehicles than they produced. With similar inventory reduction in Q2-19, Tesla posted positive free cash flow of $614 million, perhaps indicating significant free cash flow upside compared to Morgan Stanley's forecast.

Jonas expects Tesla to post a $17M profit for Q2, a number that would make Tesla eligible for inclusion in the S&P 500.

Bull Case ($2,070)

With the bull case price target increase from $1,200 to $2,070, Morgan Stanley has increased their 2030 forecasts.

  • Deliveries: 4M vehicles increased to 6M vehicles
  • Automotive EBITDA margins: 12% increased to 20%

Jonas also includes $30B of powertrain sales in his forecast, assuming Tesla begins to supply other OEMs.

On Tesla's Q1 earnings call, CEO Elon Musk said he would be shocked if Tesla's automotive business grew at less than a 40% compound annual growth rate for the next ten years. This would imply Tesla targeting at least 15M annual deliveries by 2030, well ahead of Morgan Stanley's bull case forecast.

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Base Case ($740)

Jonas has increased his base case assumptions for 2020. Morgan Stanley now forecasts 475k deliveries for the year ahead of their prior forecast of 420k. They also increased their 2021 vehicle delivery forecast to 640k, up from 620k previously. This forecast is well below Tesla's stated current installed production capacity of 690k vehicles, and their 2020 targeted expanded capacity of 790k vehicles. For more analysis, see the included video.

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Source: Tesla Q1-20 update letter

Disclosure: Rob Maurer is long TSLA stock & derivatives