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.

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.

“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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