The new year will be a telling one for Tesla Inc. (TSLA) as the bull and bear debate wages on throughout Wall Street. Morgan Stanley analyst Adam Jonas and team released a note this week looking at the possibility of the electric car pioneer easing investors’ concerns over its ugly balance sheet, major cash burn and series of equity fundraising rounds with its new Model 3 sedan. (See also: Startup Takes on Tesla with Budget Electric Car.)
Jonas suggested that the Palo Alto, Calif.-based company’s first mass-market vehicle could generate “very strong levels of free cash flow,” forcing investors to recognize a potential de-stressing of the balance sheet. He wrote that while the company has been burning through more than $1 billion of cash per quarter, the nature of its accounting indicates the cash burn pressure may begin to subside in the near term. Tesla collects payments from its customers faster than it doles out payments to suppliers, a process which can be delayed for up to 90 days.
“During times of fast production growth (as we'd expect through the first quarter of 2018), this can pull forward significant amounts of cash, which can serve to address much of the market's concerns over near-term liquidity,” wrote the analyst.
If Tesla can sell enough Model 3’s, the Silicon Valley firm may “alleviate widespread market concerns over Tesla’s liquidity and near-term funding requirements.” Jonas forecasts Tesla will deliver 8,000 Model 3s in Q1, 24,000 in Q2, 32,000 in Q3 and 46,000 in Q4. Morgan Stanley predicts the company’s cash burn will improve significantly in the first quarter and that it will report positive free cash flow of $600 million in Q2.
A stronger balance sheet, along with “larger numbers of the Model 3 in the hands of customers (for enjoyment) and OEMs (for tear-down) could drive a very sharp upward move in equity price,” wrote Jonas.
The analyst indicated that Tesla’s shares could rise another 71% over the next 12 months to reach $561. Trading down 1.1% at $327.36 on Wednesday afternoon, TSLA reflects an approximate 53.3% gain year-to-date (YTD) versus the S&P 500’s 19.9% increase over the same period.
Morgan Stanley’s note follows news that Elon Musk’s car company could be sitting on as many as 1,200 preorders of its new electric semi truck. On Tuesday, Tesla secured its largest order yet with United Parcel Services Inc. (UPS) announcing a pre-order of 125 all-electric trucks, exceeding PepsiCo Inc.’s (PEP) order for 100 vehicles last week. (See also: Tesla's Electric Truck Meets Early Success.)