Adam Jonas’s Thoughts on Tesla: Facts or Fantasies?

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The trading week of May 20–24 was not kind to Tesla. The stock dropped more than 20 points, which translates into a loss of some $3.5 billion in market capitalization. The primary reason for the plunge was investor reactions to a full-court press of negative comments from analysts and the media.

A central figure in the week’s vortex of negativity was Morgan Stanley analyst Adam Jonas. Not only had he posted recent reductions in Tesla stock’s price targets, but he went so far as to host an investor’s conference call, aimed at institutional investors, to share his negative impressions of Tesla with those companies holding the lion’s share of the company’s stock (TSLA).

How well did Jonas portray Tesla’s prospects? We have a unique opportunity to judge his presentation because just one day later, on May 23, Elon Musk issued an email to employees in which he shared critical information about second quarter vehicle production and deliveries. Armed with actual data, let’s look at the claims in Jonas’s investor call and judge his points on a scale of Hit or Miss.

Adam Jonas position

Reality Check

Hit or Miss?

Tesla is burning money.

Tesla had operating cash flow of $1.4 billion in Q3 2018 and $1.2 billion in Q4 2018. Q1 of 2019 had substantial negative cash flow, but Q2 2019 deliveries in the vicinity of Q4 2018’s would produce positive cash flows again, and expectations are that Q3 2019 will be better than Q2. One quarter does not a money burner make, especially when Musk warned early that logistics of beginning international deliveries in Q1 would lead to an additional 10,000 vehicles in transit during the quarter.


Supply of Tesla vehicles is greater than demand

Tesla’s production of Model 3 in Q1 2019 was constrained by the availability of Panasonic produced cells. Message boards indicate brisk demand for all Tesla vehicles at the moment. With M3 production at 900/day, trying to push 1000/day, production is the bottleneck in Q2, not demand. Q2 increase in production is possible because of shift to standard range M3s, which use fewer cells. No standard range M3s were shipping to Europe or China in Q1. Musk’s email explained how 50,000 new orders had come in already during the first 7 weeks of Q2, suggesting continued growth of organic demand.


Nobody cares about Model Y

In Q1, Model 3 was the highest grossing vehicle of any type in California. As Jonas points out, the sedan market is dying in America. It’s being replaced with the CUV and SUV market, which is why Elon Musk predicts Model Y will outsell S,X, and 3 combined. If you review the Model Y presentation, you’ll see how Musk downplayed the vehicle (likely to avoid distracting from Model 3 orders during the long wait for Model Y). Moreover, the Tesla Semi is a commercial vehicle with extremely attractive economics and it, too, begins production in in 2020.

Miss by a mile

China is a big concern

Model 3 begins production in China late this year, and the vehicle will be tariff-free to Chinese customers, regardless of trade war status. Chinese automotive expert Michael Dunne appeared on the May 26 edition of Autoline This Week and explained how well positioned Tesla is for success in China with its factory, huge support from Shanghai’s government, and the Chinese being big fans of Tesla and Elon Musk. Meanwhile, teardown expert Sandy Munro says the China-built Model 3 SR should generate 25% gross margins. Current orders in China for long-range Model 3s with tariffs attached does not provide a good basis for judging demand for the more affordable Model 3s soon to be built in the country.


Tesla is no longer a growth story

To solve the battery cell bottleneck, installation of three fast cell production lines at GF1 and transition to local labor will help in the short run. In long run, changing to a dry electrode battery technology pioneered by recently-acquired Maxwell Technologies will allow many times the production within the existing factory space. These cheaper and longer-lasting batteries will allow Model Y and Semi to move forward with adequate cell availability and cost reductions of about 20%. The exciting lineup of future Tesla models, along with GF3 coming on line, will allow substantial growth in 2020. Musk’s email suggests that Tesla has a chance in Q2 to exceed the 90,700 vehicles delivered in Q4 2018 if production allows.

Miss by a country mile

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The problem with the Jonas report on Tesla was not one or two isolated points, but rather a pattern of over-the-top negativity that completely distorts the company’s attractiveness as an investment.

The publication of these points of negativity brought up by Jonas damaged Tesla’s stock price because the public expects analysts from a firm with the stature of Morgan Stanley to be capable of somewhat accurately analyzing a company that falls within their specialty. Moreover, Jonas went after Tesla’s biggest investors with this presentation, the people who could most damage Tesla’s stock price. He called Tesla “a distressed-credit story and restructuring story,” thus sounding his alarm as loudly as possible.

The fallout for Tesla was greater than what one would expect from just a bad analyst’s opinion, however. In a note released by Jonas earlier in the week, he dropped his bear-case price target for Tesla from $97 to a mere $10 (yet didn’t change the overall price target). This amount was so far removed from reality that even Musk’s nemesis Jim Cramer called the number “really insane.” Nonetheless, that $10 target received enormous traction as reporters of every type picked up and repeated the $10 price target story. Predictably, a copycat “really insane” worst-case target soon followed, this time from Citigroup, as it gave a $36 target which was likewise picked up by reporters. Such ridiculously low targets turned out to be a truly effective form of FUD, however, and those of us who share Tesla stock information with friends and family members were deluged with questions from worried stockholders ready to sell. If the goal was to drive down the stock price, it worked.

The calamity of a seriously inaccurate appraisal of a company’s prospects reached its zenith as reporters chose to write stories about Jonas’s imaginings rather than base stories upon the far less sensational words of Tesla’s CEO, who had just indicated to employees that Q2 looked promising. The week concluded with the Associated Press sending out a story which quoted Senior Analyst Jessica Caldwell of Edmunds as saying, “There doesn’t appear to be anything in the (product) pipeline that is going to save them.” Each retelling of the story gets worse as the ethics of click reporting continue to erode the few remaining hints of journalistic integrity still out there.

To Adam Jonas, I pose this question: Knowing what you learned from the Musk email to employees the day after your investor’s call, are you going to publicly share a significantly revised view of Tesla within a week?

A lack of action would suggest only the worst of motivations for producing such an inaccurate assessment of Tesla. Mr. Jonas, do the right thing.

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