Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Well, that was quick. It's been less than four months since Morgan Stanley recommended that investors buy shares of electric-car maker Tesla (NASDAQ:TSLA), predicting the stock would rocket from less than $240 a share to more than $300. Since then, Tesla has run up more than the 25% that Morgan Stanley predicted -- in fact, the stock closed last week within a whisker of $325.
But now, Morgan Stanley says that Tesla's run is done.
This morning, in a surprising change of heart, the banker announced it is downgrading Tesla stock. Here are five things you need to know about that.
1. Mission accomplished
First and foremost, Morgan Stanley is not saying that it was wrong about Tesla. The analyst said in January that it thought Tesla stock was worth $305 a share. It still thinks so today. As explained this morning in a write-up on StreetInsider.com, although it's downgrading Tesla stock from overweight to equalweight, Morgan is standing pat on its price target: Still $305 a share.
2. What's going right for Tesla
One other thing Morgan Stanley was right about: Four months ago, the analyst predicted that the introduction of Tesla's Model 3 sedan would have "a significant positive impact on earnings and our price target." More and more, that prediction appears right on the money.
Earlier this month, Tesla updated investors on the Model 3's progress, and assured us that "Model 3 vehicle development is nearly complete" and "on plan to start production in July." Tesla expects to achieve production of "5,000 vehicles per week at some point in 2017, and ... 10,000 vehicles per week at some point in 2018." (Based on this status report, Morgan Stanley rival ISI Evercore upgraded the stock.)
3. What's going right for Tesla...that might soon go wrong
We also recently learned that Tesla sales in China have tripled to more than $1 billion, making China Tesla's No. 1 market worldwide. But while this sounds like good news, it could be a red herring. In its report today, Morgan Stanley worries that China will in fact not be a significant market for Tesla long term.
4. What hasn't yet gone right for Tesla...and won't
At the same time, Morgan Stanley echoed concerns that my Foolish colleague Travis Hoium expressed back in January, that Tesla's acquisition of SolarCity could turn into a "costly mistake," and Tesla may even be preparing to "giv[e] up on solar" after shuttering its door-to-door salesforce.
Whether or not Tesla gets out of the solar power business, though, Morgan Stanley warns that it doesn't see solar power -- or even solar storage batteries or electric trucks -- as big enough opportunities to "significantly move the needle" at Tesla.
5. Competition looms
Last but not least, it's worth remembering that when Morgan Stanley recommended buying Tesla stock four months ago, it did so in part on a conviction that driverless car initiatives from Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) were looking less threatening to Tesla. At the time, Morgan Stanley was of the opinion that Alphabet and Apple were pulling back from idea of making automobiles, and would probably focus on just building software to operate other people's cars.
Now, Morgan isn't so sure.
Once more, from StreetInsider.com: Morgan Stanley is beginning to believe that "much larger and more well capitalized competitors" (Hint: This appears to be code for not just Apple and Alphabet, but potentially Amazon.com as well!) will "unveil strategies that directly address sustainable transport and mobility." In other words, whereas four months ago, Morgan Stanley liked Tesla stock because it saw the risk of competition fading, today the analyst sees something that's got it worried the threat of competition may instead be growing.
The most important thing: Where there's smoke, there's a cash bonfire
Morgan doesn't deign to tell us exactly what it is that has it jumping at Alphabet-, Apple-, and Amazon-shaped shadows (or at least nothing that made it into StreetInsider's write-up). But here's something a bit more concrete that should worry you:
Last we heard, the analysts who were more optimistic about Tesla were predicting the company would finally turn profitable in 2019. But this may no longer be the case. According to a survey of analysts conducted by S&P Global Market Intelligence, consensus predictions now call for Tesla to lose $0.73 per share in 2019, and not turn profitable before 2020.
For its part, Morgan Stanley says Tesla might turn the corner and report a small profit in "late 2019." On the other hand, Morgan is raising its estimate for cash burn by 35% this year, and now predicts Tesla will run free cash flow negative to the tune of $3.1 billion. Barring yet another stock sale, this could leave Tesla with less than $1 billion in cash by year end.