Tesla Inc (NASDAQ:TSLA) stock was in the red on Monday morning as the rally finally ran out of gas. Only time will tell whether that “death cross” has finally come to call or if the stock has again evaded the bears.
Morgan Stanley analyst Adam Jonas may have an Equal-weight rating and $379 price target on Tesla stock, but he remains a perma-bull, as evidenced by his notes. His latest note offers analysis of the EV maker’s free cash flow and working capital models. He suggests that the Model 3 will bring in a much-needed influx of cash just when the company needs it most.
However, a Seeking Alpha contributor is calling out his analysis as “misleading” and highlighted some discrepancies with it.
Tesla stock to rise on cash flow improvements
According to Jonas, investors seem to be “seriously underestimating” the positive impact the Model 3 ramp will have on Tesla’s cash flow and working capital. He does admit that the “inflection” he expects in free cash flow will be temporary, but as always, he expects Tesla stock to soar when the company’s balance sheet improves.
He said that most investors already expect larger volumes of Model 3 deliveries by early spring, but he doesn’t believe investors understand what bigger volumes might mean to the automaker’s liquidity and cash flow. Because of that current lack of understanding, he believes Tesla stock could even “drive a very sharp upward move” when the inflection he expects occurs. In fact, he thinks Tesla stock could even test his bull case of $561 per share when investors are “forced to recognize the potential de-stressing of the balance sheet.”
How Tesla stock could rise on working capital
One of the bear arguments for Tesla stock has long been the company’s seemingly never-ending need for additional capital, but Jonas believes the working capital arrangement Tesla has with its suppliers could be very favorable during the Model 3 ramp. He noted that the EV maker pays its suppliers over 60 to 90 days but collects from its customers about 10 to 20 times faster than it pays its suppliers. As a result, when the company dramatically ramps production, as it is doing for the Model 3, “significant amounts of cash” could be pulled forward, potentially addressing investor concerns about liquidity in the near term.
He expects a sharp improvement in Tesla’s free cash flow to more than $600 million in net positive free cash flow by the second quarter, based on working capital movement at play in payables and receivables. He expects the automaker to deliver 8,000 Model 3 cars in the first quarter, 24,000 in the second, and 32,000 in the third quarter of next year. He estimates that the Model 3 ramp will add almost $1.5 billion in free cash flow in the first half of 2018 as other liabilities and deferred revenues increase.
Jonas’ price targets for Tesla stock are wide open from his bear case at $175 to his bull case at $561, with his base case set at $379.
A “remarkable” note on Tesla stock?
In a post on Monday, Seeking Alpha contributor Montana Skeptic called Jonas’ note “remarkable” for several reasons. He went on to compare his projections with those from CoverDrive, which recently indicated that Tesla will remain “structurally bankrupt even after a full Model 3 ramp-up.” Interestingly, CoverDrive reran his Tesla forecast for 2018 using Jonas’ delivery numbers and found that the EV maker was even further underwater. CoverDrive claims that Jonas’ model results in a GAAP loss of $2.6 billion for Tesla in 2018.
Additionally, others claim that Jonas slashed his 2018 delivery forecast for Tesla to about 223,000 vehicles in total, which is even below the automaker’s own guidance of 300,000 or more. However, Jonas doesn’t actually come right out and say that he reduced his forecast.
The face-off between Morgan Stanley and CoverDrive illustrates how Tesla stock bulls and bears do math differently when it comes to the EV maker. The shares will undoubtedly remain volatile for quite some time, at least until it becomes clear whether the company will be able to straighten out Model 3 production. More recently, investors have probably been buying shares due to excitement over the company’s electric semi, even though it will probably be years before buyers start taking deliveries.
Tesla stock fell by about 1% on Monday, dipping as low as $340.20 in intraday trading.