Adam Jonas: Tesla Could See A Major Inflection In Free Cash Flow Next Year

Tesla Inc TSLA short sellers have gained fuel amid Model 3 setbacks and temporary capital solutions leveraging new vehicle reservations.

But Morgan Stanley thinks those justifications are soon to dissolve.

The Rating

Analyst Adam Jonas maintained an Equal Weight rating on the stock with a $379 price target.

The Thesis

Rating aside, Jonas confessed the potential for upside even to his $561 bull case.

Tesla’s working capital arrangement, despite the temporary nature of improvements, can drive “significantly large levels” of free cash flow, destress the balance sheet and contribute to a “very sharp” rise in equity price, he argued. He expects $600 million in positive FCF by the second quarter of 2018.

At the same time, Taiwanese suppliers have suggested on-pace solution of Model 3 bottlenecks, and Morgan Stanley suspects Tesla baked in liquidity and supplier flexibility to accommodate an early 2018 ramp.

“The stock market is beginning to discount the very high likelihood that the Nevada production bottleneck is soon resolved (mid to late 1Q18),” Jonas wrote. “However, we believe the market may be seriously underestimating the positive (albeit temporary) impact on Tesla working capital and cash flow.”