Have you ever heard of a “backhanded compliment”? It basically means something that looks like a compliment on the surface, but when you look at the terms and circumstances more closely, it loses much of what may have made it a compliment in the first place. Morgan Stanley recently did something similar with Tesla (NASDAQ: TSLA), hiking its bull case on the stock to nearly double its previous value, but holding on to its current rating.
The Sky's the Limit on Tesla at Morgan Stanley
Morgan Stanley started out the week with a fairly sedate—and already shattered—bull case for Tesla that saw the stock at $650 a share. With that mark having been left in the dust since the end of January, it was clear Morgan Stanley needed new numbers for Tesla. It responded accordingly, nearly doubling its bull case projection to $1,200 a share.
Such a projection isn't necessarily out of line; the stock has already tripled in value over the course of the last six months. To reach the bull case projection, though, the stock would need to jump about another 50% over its current level, $855.78 as of this writing.
The bull case also—according to Adam Jonas, a Morgan Stanley analyst—expects Tesla to sell four million units by 2030, done on a 12% margin for operations. That's a pretty significant step up from previous figures of 2.2 million units sold at a 10% margin.
But Expect Disappointment, Like Morgan Stanley Does
The “backhanded” part of the compliment comes in when you consider that Morgan Stanley hiked its bull case to nearly double current levels, but left the rating on the stock alone, holding it at “underweight.”
Jonas further noted here that the risks Tesla presented outweighed the possible rewards—even with a bull case like that—, particularly when compared against other carmakers like Ford (NYSE:F). The first quarter is expected to be particularly challenging for Tesla, and Jonas believes the company will deliver about 89,000 vehicles in the first quarter. That's below the current consensus projection of 99,000, and Jonas also believes a quarterly loss is in the offing to the tune of $440 million, spoiling any hope of making the S&P 500 this year.
However, even with this prediction in place, Tesla stock is already up about 5% over the previous close as of this writing, making a distinct possibility that the market is looking beyond one likely sluggish quarter.
A Perfect Storm Striking Tesla
The most pernicious issue faced here is the ongoing coronavirus impact in China, both on production and demand. With factories still struggling to get back to work after the artificially-extended Lunar New Year holidays, and workers still likewise struggling to get back to paying work, it's a double-sided hit to Tesla's profit ambitions.
Throw in some sluggish results elsewhere—reports have already suggested that the German expansion has been hampered on several fronts, including the discovery of undetonated World War II explosives near the new factory site—and Tesla profitability in this quarter doesn't exactly look bright. Worse, the markets that are much less impacted by coronavirus, like North America and Europe, are markets that Tesla has already been operating in, and thus has already pulled a lot of the low-hanging fruit therein. Throw in the recent pursuit of extra capital and that may prove a further drag on the company's upward rise as potential investors wonder if the company is diluting its share value by issuing a lot more available shares.
Sure, Tesla still has some hope to it, especially if it can pull a bit of a marketing shuffle in those already-sold areas with ancillary products like the Powerwall battery. But to pull out a profitable quarter and give itself a chance at the S&P 500, it's going to need to start tapdancing, and very quickly, to close the gap the coronavirus has created in the interim. Time may be working against Tesla here to recover its lost business potential.
Hope for the best, plan for the worst; that seems to be the overarching theme when it comes to Morgan Stanley's Tesla value projections. It's a strategy that has worked before...and is likely to continue working for the near term in Tesla.