Electric carmaker Tesla Inc. (TSLA) is finally showing signs of turning the corner on production problems with its new Model 3 sedan, Morgan Stanley (MS) writes in a research report released on Friday. Morgan Stanley believes that bottlenecks in Tesla's Nevada plant will be resolved in the latter half of the first quarter of 2018, and that "the market may be seriously underestimating the positive (albeit temporary) impact on Tesla working capital and cash flow."
A Possible 63% Stock Spike
Tesla, already up 61% year-to-date, is rated equal weight by Morgan Stanley with a $379 price target. That's 9.9% above its $344.90 open on Monday, but 2.7% below its high of $389.61 reached in June. But Morgan Stanley also has a bullish case for a $561 share price, up 63% from its Monday open, according to its December 15 report.
That bullish scenario, which is not unlikely, means that traders and other short-term investors in Tesla shares could profit handsomely if the automaker's shares spike. Indeed, Morgan Stanley writes that "Tesla is distinctively positioned to commercialize an app-based, on-demand mobility service." Tesla Mobility and the related Tesla Network are initiatives to provide such a service through self-driving vehicles as a mass transit option. The $561 target rests on a combination of: new model introductions that lead to significantly expanding production volumes and expanding profit margins in Tesla's core auto business; rapid growth of Tesla Mobility; and the successful development of Tesla Energy, its venture into battery backup for electric power grids, into a major business. (For more, see also: Why Tesla Will Be No.1 Big Tech Stock In Next 5 Years.)
Risky Road Ahead
Longer term, however, Morgan Stanley sees a potentially bumpy road ahead for Tesla and its stock investors due to increasing competition. As a loss-producing enterprise with a high cash burn rate, Tesla is constantly scrambling for funds. Getting production of the Model 3 up to a level where the company can start filling its order backlog as fast as possible thus is critical to alleviating its near-term liquidity issues. Morgan Stanley calculates that Tesla collects on its accounts receivable from customers about 10-to-20 times faster than it settles its accounts payable to suppliers, making the rapid ramping up of production an imperative.
While Morgan Stanley expects fast production growth in 1Q18 to drive a marked improvement in free cash flow (FCF), they project that net positive FCF will not be achieved until 2Q18. Moreover, Morgan Stanley forecasts that Tesla will burn more than $1.1 billion of FCF in full year 2018, even while estimating that deliveries of the Model 3 will rise from 8,000 in 1Q18, to 24,000 in 2Q18, to 32,000 in 3Q18, and finally to 46,000 in 4Q18. (For more, see also: James Chanos Calls Tesla's Equity 'Worthless.')
The Bear Case
Morgan Stanley's bear case prices Tesla's stock at $175, just over half its current value. Among the dangers faced by Tesla that can lead to this dramatic erosion of shareholder value are: Tesla Mobility never gains traction, and Tesla Auto remains merely a niche player in the auto industry; failures in execution of the company's ambitious, cutting-edge innovations; changes in the prices of key commodities, notably oil, that make electric vehicles less economic; diminished appetite by investors to fund Tesla's grandiose ambitions; and competition from larger, better-capitalized technology firms. Morgan Stanley could have added that deep-pocketed established automakers already are developing innovations that challenge Tesla. (For more, see also: How Big Automakers Will Speed Past Tesla.)