Tesla's Wall Street Romance Is Over
Morgan Stanley's Adam Jonas concedes that Tesla is just a poorly-run automaker, signalling an end to its run as a momentum "story stock".
Ever since Tesla's 2013 "miracle month," the electric automaker's valuation has soared well beyond what the fundamentals of a car manufacturer's capital-intensive, low-margin business might support. While automaker valuations languished even through years of bumper sales and profits, Tesla's stock soared on the strength of the idea that it was a "technology velociraptor," in the words of CEO Elon Musk, and not just some "metal bender." Now, after 6 years of reality-defying euphoria the Tesla story is coming back down to earth and taking the stock price with it... or is it the other way around?
Morgan Stanley autos analyst Adam Jonas has been one of main authors of Tesla's high-tech disruptor narrative on Wall Street, having recommended a price target as high as $450 per share in 2015, valued its nonexistent "Tesla Mobility" division at over $100 per share and generally hyped Tesla's ability transcend the tough economics of auto manufacturing. Just two short years ago, he compared Tesla's "disruptive" impact to Henry Ford, Thomas Edison and Cornelius Vanderbilt, and explicitly stated that Tesla shouldn't be seen as just an automaker. "We think the sooner that the market can start to view Tesla as something other than just selling machines for people to own privately and operate in some automated form themselves, the more the events of the next few years are going to make sense" he told BusinessInsider.
Now, in a private call with Morgan Stanley clients, Jonas is dramatically changing his tune. Though he continues to think Tesla's technology is superior to other automakers, he's now talking about the company as if it were just another automaker. His justification for this about-face comes down to Tesla's slowing sales growth and massive debt load, which he says makes Tesla a "restructuring story." I know it's heresy to suggest that you can compare the valuation of Tesla with its genuinely class leading tech and brand positioning to Volkswagen," he said, "but you know if this company is not growing you invite yourself to those comparisons even at a zero dollar equity value the enterprise value to sales ratio of Tesla would be 50 percent or so higher than VW."
What Jonas is saying here is that Wall Street has pumped cash into Tesla as if its sales would keep growing forever, and they simply aren't anymore. This creates the kind of situation that has caused the majority of auto manufacturer bankruptcies: overinvestment in production capacity without the ability to sell profitably at the same rate. "They've built this hulking physical infrastructure to supply more like a million cars a year, not 350,000 cars a year," he said. "And that's what's creating this bleeding."
But in reality, this is really only part of the story. Sure, Tesla's inability to profitably build Model 3s at the projected base price of $35,000 means that sales volumes will inevitably fall short of projections but that's not really featured into the debates between Tesla bears and bulls. Instead, Tesla's boosters like Jonas framed the fundamentals of its auto manufacturing business as a distraction from the real story: its disruption of the energy sector, its autonomous mobility plans, its transformation of the car into a software platform, even the possibility of merging with Musk's SpaceX. What Jonas is saying is the exact opposite of what he told DeBord in 2017: Tesla's ability to profitably make and sell "machines for people to own" is the factor on which its disruptive potential rests.
This is what I and other auto industry watchers have been saying for years, while Jonas's fantasies of Tesla robotaxis and green energy distracted from countless red flags about the company's ability to manufacture cars efficiently and profitably. Ironically, these problems worked in Tesla's favor for a long time, with its organizational chaos and lack of manufacturing focus keeping it production constrained and preventing the oversupply that plagues it today. Indeed, if Tesla had efficiently invested the $4.5 billion it has raised to achieve 500,000 units per year of Model 3 production that remains elusive to this day, its overcapacity problems would be even worse today.
So while Jonas remains focused on demand, the reality is that Tesla's demand is only a problem relative to the massive amounts of cash that his employers have helped the automakers raise through debt and equity sales. Had Jonas been consistently cautious about Tesla's ability to build $35,000 cars at high volumes (which even the most cursory analysis of its manufacturing and operational record should have prompted), Tesla might have been forced to focus on the fundamentals of its core business. Instead, by hyping its high-tech hopes and dreams and downplaying its status as an auto manufacturer, Jonas helped pump Tesla's balance sheet with the very overinvestment that now has him calling for a restructuring.
After all, Jonas had an opportunity to raise these concerns just three weeks ago when his employers at Morgan Stanley served as book-running underwriters for a $2.7 billion Tesla debt and equity raise. If Jonas is worried about Tesla's sales growth relative to its capital structure today, there's no reason he shouldn't have been worried about it three weeks ago. The only thing that has changed since then is that Morgan has collected the hefty fees it earned by piling more debt onto Tesla's books. To say that the timing of Jonas's road to Damascus moment serves Morgan Stanley far better than its clients would be a significant understatement... especially since the details of Tesla's last capital raise suggest that its market magic is wearing off.
Ultimately though, Tesla has only itself to blame for its thorny predicament. Ever since the fateful first quarter of 2013, Musk has done everything in his power to push the company's stock price higher, spinning story after story about battery swap, solar Superchargers, the Solar City merger, autonomous robotaxis, streaming music services and anything else that might tickle the market's fancy. Nobody forced Musk to pay off government loans and get into bed with the Wall Street banks, let alone let Tesla's fundamentals fester, and he has profited handsomely from the intervening years of frothy stock prices. Now that the party seems to be ending and former narrative-pumpers like Jonas are turning on him, he is simply paying a price that was always going to be paid.
The highs and lows of Tesla's dance with the Wall Street devil holds numerous lessons for other mobility technology startups, but the most important is that auto manufacturing is, always has been and will always be about fundamental execution. Wall Street might buy (and more importantly, sell) your stories of high tech disruption, but if you raise too much cash and can't make the unit economics work consistently it's just a matter of time before they turn on you. Tesla has survived a lot longer than its fundamentals suggest it should have, and it has undoubtedly made a mark on automotive history, but its main lesson may well end up being the auto industry's oldest.