Morgan Stanley Raises Tesla Estimates After Earnings Analysis

Tesla Inc TSLA’s second-quarter cash performance and year-end outlook came in better than Morgan Stanley had expected. The metrics prompted sharp adjustments to forecasts.

The Rating

Analysts Adam Jonas and Armintas Sinkevicius maintained an Equal-Weight rating on Tesla with a $291 price target.

The Thesis

Jonas and Sinkevicius don't expect Tesla to hit its targeted GAAP profitability and positive free cash flow in the third quarter, but they became more positive on related metrics. The analysts raised their GAAP net income expectation from a $1 billion loss to a $400 million loss and predicted FCF burn of $200 million against a previous estimate of $1 billion.

They also pushed back forecasts for a capital raise, from $3 billion in the third quarter to $2.5 billion in the fourth.

Given Tesla’s recent performance and guidance, Morgan Stanley increased third-quarter Model 3 delivery estimates from 33,600 to 50,400 and 2019 estimates from 260,000 to 312,000. The analysts also raised their 2018 auto gross margin forecast from 20 percent to 22 percent.

While maintaining their price target, they celebrated Elon Musk’s improved reputation, management’s improved cash discipline, Tesla’s new position to be able to raise capital out of desire rather than necessity, and the firm’s untapped potential.

“Tesla’s true utilization of its capacity is extremely low…leaving the potential for a step-change in operating results and free cash flow that may take the market by surprise near term,” Jonas and Sinkevicius wrote in a note.

At the same time, they warned investors Tesla’s 2018 achievements may not be sustainable in 2019 and beyond.

“At the margin, we think the stock may struggle to sustain sharply higher market expectations,” the analysts wrote.

Price Action

At time of publication, Tesla shares were trading around $353. The stock spiked around 12:20 p.m. after Financial Times reported Saudi Arabia's sovereign wealth fund has built a 3-5 percent stake in Tesla since the beginning of the year.

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