MORGAN STANLEY: Tesla’s future will be decided by 3 questions

Tesla founder Elon Musk arrives for the the annual Allen and Co. media conference Sun Valley, Idaho.

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Tesla founder Elon Musk arrives for the the annual Allen and Co. media conference Sun Valley, Idaho.
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Reuters/Mike Blake

    Tesla is getting clobbered after disappointing earnings results and a potential tax credit cut. There are just three questions to consider when trying to evaluate the company’s future, according to Morgan Stanley. Hitting the company’s first-quarter of 2018 production goals could be a good step toward reversing Thursday’s downward slide. Watch Tesla’s stock price move in real time here.

Tesla reported a terrible third-quarter on Wednesday, including its biggest quarterly loss ever. Analysts scrambled on Thursday to make sense of the earnings, trying to decide whether to bet on the company’s promising future or troubling present.

For Adam Jonas, an analyst at Morgan Stanley, there are just three things to think about when evaluating Tesla.

“(1) What is happening to demand for the product? (2) What is the pace of cash consumption? (3) How open are capital markets to funding Tesla’s very ambitious growth plan?,” Jonas wrote in a note to clients.

After the earnings results, Jonas said he feels great about demand for Teslas, is slightly concerned about the company’s cash flow and thinks Tesla’s growth plan funding is in good shape “… for now.”

Demand for Tesla’s vehicles continues to be strong. The company delivered its 250,000th car in the third quarter and expects to deliver 100,000 Model S and Model Xs in 2017, a 30% jump from the previous year.

For the Model 3, the company’s first mass-marketed car, more than 450,000 people have preordered the car. GOP lawmakers added a potential roadblock to Tesla’s plans on Thursday, though, as reports say the current $7,500 tax credit buyers can receive for the purchase of an electric vehicle could be cut as a part of the party’s tax-reform efforts, according to Bloomberg.

The second question, the pace of cash consumption, is one of Jonas’ biggest worries.

“Fourth quarter capex guidance is around $200 million above our current $800 million forecast,” Jonas said. “Discussion of future cash flow was characteristically vague but the CFO emphasized that the eventual Model 3 ramp will be accompanied by substantial operating cash flow.”

Tesla burned through $1.4 billion in cash in the third quarter, according to data from Bloomberg.

As the carmaker matures into a larger, more established company, execution becomes more and more of an issue, Jonas said. Battery production bottlenecks have thus-far crippled production of the Model 3, and Tesla only made 260 in the third quarter. The company’s goal to produce 5,000 Model 3s a week in December has been pushed back to the end of the first quarter. Hitting that goal could be a good step toward a rising stock price, Jonas said.

“If such production is not accompanied by an increase in cash consumption, we believe the stock will trade materially higher than it does today,” Jonas said while cautioning that forecasting Tesla’s ability to hit this goal is extremely difficult.

For now, Jonas said betting on Tesla isn’t worth it. He said he’s “watching from the sidelines,” but says there is a future where Tesla’s shares start moving higher.

Tesla is down close to 8% on Thursday but is still up 37.88% this year.

Read more about Tesla’s third quarter results here…

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Markets Insider