Tesla Motors Inc: Don’t Worry About Cash Burn, Says Morgan Stanley

Tesla Motors Inc: Don’t Worry About Cash Burn, Says Morgan Stanley
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If Tesla really keeps releasing innovative cars that excite consumers, then the near-term cash use may not matter much in the grand scheme of things

When Tesla Motors revealed plans to burn through large piles of cash this year on capital expenditures, investors were naturally concerned. Mega-bulls were unperturbed, however, saying that it will be money well spent.

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Cash burn over positive FCF, buybacks any day

In a report dated Feb. 19, Morgan Stanley analyst Adam Jonas and his team said Tesla will be capable of so much disruption in the auto industry that they’re not too worried about all the cash that will be spent this year. The report is the latest on the topic of the automaker’s insane amount of capital expenditures that are planned for this year.

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“Who would you rather give $1.5bn to invest in 2015: [Tesla CEO] Elon Musk or your average auto company?” the report begins. “The answer is clear to us. If the Model X launches in August and does the things we think it can do, we believe this stock can set new highs by year end.”

Tesla compared to Ford in capex

In Tesla’s earnings report, it revealed plans to spend $1.5 billion on capital expenditures. That’s almost 25% of what Ford said it is planning to spend this year. Jonas points out that Ford is 40 times larger than Tesla by revenue and more than 200 times bigger by volume.

When looking at Tesla’s planned capital expenditures as a proportion of revenues, the EV manufacturer will spend 10 times as much as Ford this year. Jonas says he’s comfortable with this, however, because of Tesla’s chance to “burrow into an auto industry ripe for change.”

He remains confident that the company will keep releasing “innovative vehicles that bring a customer and [sic] technological experience unlike any other vehicles on sale by rival auto firms.”

Tesla will test investors’ nerves

Because of the massive amounts of money Tesla plans to spend on capital expenditures and the amount of cash the automaker is going to burn through, it’s clear that investors’ patience will be tried. Indeed, the risks of investing in a company like Tesla are greater, but the greater risks means there is also a greater potential reward—if Tesla can pull off everything Musk sets out to do.

The Morgan Stanley team reiterated their Overweight rating and left their price target at $280 per share. They would rather see “the pain of cash burn” over the next year to year and a half at Tesla than the share repurchases and positive cash flow other automakers offer.

They expect Tesla to use up about half of its gross cash by the end of this year and third-quarters of its liquidity by the middle of next year. When considering whether the EV maker needs to raise more money, they said, “Maybe not on a spreadsheet, but on our math there’s not a ton of room for error here.”

As of this writing, shares of Tesla Motors were up by 2.66% at $209.54 per share.

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
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  1. In answer to your question I would rather give my money to an established company like Daimler or BMW as an EV investment.
    Tesla is too new, too unproven, too inaccessible and really a Luxury Barbie Car for the likes of Paris Hilton (if in Pink).
    Also; all EV is; is an alternative fuel….not the “no more fuel” the greenies think. Electricity has to be generated; which is done mostly by burning coal or natural gas. The latter being the new paradigm. So the question is the impact that has on environmental issues as well as economic. For starters….what does it cost to charge your Tesla versus a tank of gas.
    And for the greenies; what is the emissions and mining impact of the burning of coal or gas to produce the electricity?
    Seems to me like a very expensive scam in the long run.
    Only thing that might tickle my fancy is self generating solar power with a backup battery system. Until that happens it’s a matter of burning this or burning that; and really an inferior car when compared to conventional Luxury Makers..

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