Tesla (TSLA) May Be the Amazon of EVs - Morgan Stanley

Recently Tesla Motors (NASDAQ: TSLA) investors were taken back by comments from CEO Elon Musk that there would potentially be no US GAAP profitability before 2020. Today, Morgan Stanley analyst Adam Jonas weighed in on the comments saying he believes Elon "meant what he said". Jonas said Tesla's growth and ambition may expose Tesla to risks investors have not prepared for. "IsTesla the Amazon of EVs?," he asks - suggesting a consistently unprofitable company but a great stock.

Musk's 'no US GAAP profitability by the year 2020' comments compared to Jonas' forecast of Tesla achieving nearly $1.6 billion of US GAAP profit by 2020. "Granted, Elon's comments may imply level of leasing penetration and employee stock compensation different from our forecasts," Jonas said. "Or perhaps they include a level of capital expenditure and R&D spending vastly in excess of our forecasts as the company pursues 'millions of units' of vehicle sales annually by 2025. Our forecasts, by comparison, are based on 563k complete annual unit sales by 2025. Perhaps Elon's comments were made to send a defiant message in the face of the falling oil price that it is not giving up on its mission to bring electric mobility to the masses. In any case, for a stock where many untested long-term earnings and growth assumptions must be made to value the company, the comments take the tone of forecast uncertainty to entirely new levels."

Jonas said Tesla is feeling pressure from 3 different sources: (1) Falling oil price, (2) stronger US dollar and (3) questions about the long-term earnings trajectory. "In our opinion, lower prices for fossil fuel and in particular $2/gallon gasoline play against the economic rationale of electric vehicles, at least on some categorical level," he said. "For sure, Tesla's current customer base is not buying a Model S on economic grounds, but expectations of a far lower priced vehicle are impacted. The market appears to have rapidly caught up to this concern."

The analyst also notes Tesla has significant transaction exposure to a stronger dollar. "We believe earnings estimates may need to take into consideration the impact of the stronger US$ on Tesla's forecasts. Consider that more than one half of Tesla's revenues are non-US with an entirely US-based production complex (excluding CKD assembly in the Netherlands) exposing the company to transaction impact of weaker foreign currencies. For example, we estimate W. Europe will account for nearly 30% of Tesla's unit volume in 2015. All else equal, a 10% weakening of the Euro vs. USD could impact a full year's pretax profit by an order of magnitude as high as $100mm (excluding hedging). At this time, we have taken out $70mm from our OP forecast for 2015 ($20mm in 4Q14 and a further additive $50mm in 2015) to reflect the stronger USD. If you have not made a negative FX adjustment to your Tesla numbers... you really should."

The firm is cutting their 4Q volume and ATP forecast to reflect hiccup in China ramp. Meanwhile, the firm's price target goes to $280 from $290. The firm's 4Q volume forecast goes to 9,993 units from 11,165 units, taking full year volume to 31,814 units, or more than 1,000 below the company's FY target. This change, along with $20mm of FX headwinds (and lower ATPs) takes their 4Q gross margin assumption to 28.0% from 29.6% previously. Their 4Q forecast includes $20mm of regulatory credits.

Despite the change and increased uncertainty, the firm remains a buyer of the stock at this level. "We believe market sentiment around Tesla's success as a mass market auto company is in a healthier alignment today than just 3 or 4 months ago. There has been a lot written about how Tesla's advancement of electric mobility can make the internal combustion engine 'obsolete' in just a few years. We firmly disagree and don't need such an outcome to make Tesla a good investment today. We can justify nearly 50% upside to Tesla shares without having to make such an implied bet on breakthroughs in the cost/benefit of electric propulsion."

For an analyst ratings summary and ratings history on Tesla Motors click here. For more ratings news on Tesla Motors click here.

Shares of Tesla Motors closed at $191.93 yesterday.

You May Also Be Interested In

• Midday movers: Morgan Stanley, UnitedHealth rise; Tesla falls
• Alphabet (GOOGL) PT Raised to $174 at Stifel
• Tesla's (TSLA) Musk: We are simplifying and streamlining the whole Tesla sales and delivery system