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Adam Jonas’s Thoughts on Tesla: Facts or Fantasies?

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Published on May 29th, 2019 |

by Peter Forman (aka Papafox)

Adam Jonas’s Thoughts on Tesla: Facts or Fantasies?

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May 29th, 2019 by Peter Forman (aka Papafox)

The trading week of May 20–24 was not kind to Tesla. The stock dropped more than 20 points, which translates into a loss of some $3.5 billion in market capitalization. The primary reason for the plunge was investor reactions to a full-court press of negative comments from analysts and the media.

A central figure in the week’s vortex of negativity was Morgan Stanley analyst Adam Jonas. Not only had he posted recent reductions in Tesla stock’s price targets, but he went so far as to host an investor’s conference call, aimed at institutional investors, to share his negative impressions of Tesla with those companies holding the lion’s share of the company’s stock (TSLA).

How well did Jonas portray Tesla’s prospects? We have a unique opportunity to judge his presentation because just one day later, on May 23, Elon Musk issued an email to employees in which he shared critical information about second quarter vehicle production and deliveries. Armed with actual data, let’s look at the claims in Jonas’s investor call and judge his points on a scale of Hit or Miss.

Adam Jonas position

Reality Check

Hit or Miss?

Tesla is burning money.

Tesla had operating cash flow of $1.4 billion in Q3 2018 and $1.2 billion in Q4 2018. Q1 of 2019 had substantial negative cash flow, but Q2 2018 deliveries in the vicinity of Q4 2018’s would produce positive cash flows again, and expectations are that Q3 2019 will be better than Q2. One quarter does not a money burner make, especially when Musk warned early that logistics of beginning international deliveries in Q1 would lead to an additional 10,000 vehicles in transit during the quarter.

Miss

Supply of Tesla vehicles is greater than demand

Tesla’s production of Model 3 in Q1 2019 was constrained by the availability of Panasonic produced cells. Message boards indicate brisk demand for all Tesla vehicles at the moment. With M3 production at 900/day, trying to push 1000/day, production is the bottleneck in Q2, not demand. Q2 increase in production is possible because of shift to standard range M3s, which use fewer cells. No standard range M3s were shipping to Europe or China in Q1. Musk’s email explained how 50,000 new orders had come in already during the first 7 weeks of Q2, suggesting continued growth of organic demand.

Miss

Nobody cares about Model Y

In Q1, Model 3 was the highest grossing vehicle of any type in California. As Jonas points out, the sedan market is dying in America. It’s being replaced with the CUV and SUV market, which is why Elon Musk predicts Model Y will outsell S,X, and 3 combined. If you review the Model Y presentation, you’ll see how Musk downplayed the vehicle (likely to avoid distracting from Model 3 orders during the long wait for Model Y). Moreover, the Tesla Semi is a commercial vehicle with extremely attractive economics and it, too, begins production in in 2020.

Miss by a mile

China is a big concern

Model 3 begins production in China late this year, and the vehicle will be tariff-free to Chinese customers, regardless of trade war status. Chinese automotive expert Michael Dunne appeared on the May 26 edition of Autoline This Week and explained how well positioned Tesla is for success in China with its factory, huge support from Shanghai’s government, and the Chinese being big fans of Tesla and Elon Musk. Meanwhile, teardown expert Sandy Munro says the China-built Model 3 SR should generate 25% gross margins. Current orders in China for long-range Model 3s with tariffs attached does not provide a good basis for judging demand for the more affordable Model 3s soon to be built in the country.

Miss

Tesla is no longer a growth story

To solve the battery cell bottleneck, installation of three fast cell production lines at GF1 and transition to local labor will help in the short run. In long run, changing to a dry electrode battery technology pioneered by recently-acquired Maxwell Technologies will allow many times the production within the existing factory space. These cheaper and longer-lasting batteries will allow Model Y and Semi to move forward with adequate cell availability and cost reductions of about 20%. The exciting lineup of future Tesla models, along with GF3 coming on line, will allow substantial growth in 2020. Musk’s email suggests that Tesla has a chance in Q2 to exceed the 90,700 vehicles delivered in Q4 2018 if production allows.

Miss by a country mile

The problem with the Jonas report on Tesla was not one or two isolated points, but rather a pattern of over-the-top negativity that completely distorts the company’s attractiveness as an investment.

The publication of these points of negativity brought up by Jonas damaged Tesla’s stock price because the public expects analysts from a firm with the stature of Morgan Stanley to be capable of somewhat accurately analyzing a company that falls within their specialty. Moreover, Jonas went after Tesla’s biggest investors with this presentation, the people who could most damage Tesla’s stock price. He called Tesla “a distressed-credit story and restructuring story,” thus sounding his alarm as loudly as possible.

The fallout for Tesla was greater than what one would expect from just a bad analyst’s opinion, however. In a note released by Jonas earlier in the week, he dropped his bear-case price target for Tesla from $97 to a mere $10 (yet didn’t change the overall price target). This amount was so far removed from reality that even Musk’s nemesis Jim Cramer called the number “really insane.” Nonetheless, that $10 target received enormous traction as reporters of every type picked up and repeated the $10 price target story. Predictably, a copycat “really insane” worst-case target soon followed, this time from Citigroup, as it gave a $36 target which was likewise picked up by reporters. Such ridiculously low targets turned out to be a truly effective form of FUD, however, and those of us who share Tesla stock information with friends and family members were deluged with questions from worried stockholders ready to sell. If the goal was to drive down the stock price, it worked.

The calamity of a seriously inaccurate appraisal of a company’s prospects reached its zenith as reporters chose to write stories about Jonas’s imaginings rather than base stories upon the far less sensational words of Tesla’s CEO, who had just indicated to employees that Q2 looked promising. The week concluded with the Associated Press sending out a story which quoted Senior Analyst Jessica Caldwell of Edmunds as saying, “There doesn’t appear to be anything in the (product) pipeline that is going to save them.” Each retelling of the story gets worse as the ethics of click reporting continue to erode the few remaining hints of journalistic integrity still out there.

To Adam Jonas, I pose this question: Knowing what you learned from the Musk email to employees the day after your investor’s call, are you going to publicly share a significantly revised view of Tesla within a week?

A lack of action would suggest only the worst of motivations for producing such an inaccurate assessment of Tesla. Mr. Jonas, do the right thing.

About the Author

Peter Forman (aka Papafox) Peter is a writer and innovator who began buying Tesla’s stock at $28 a share and has never looked back. This former airline pilot and college professor has a passion for applying new technologies to education. More recently, he has focused on understanding the trajectory of today’s clean energy revolution. He drives a Tesla and powers 100% of his house and vehicle’s energy needs through rooftop solar panels.

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Read Tesla CEO Elon Musk’s email to employees: Company averaged 900 Model 3s per day this week

Tesla CEO Elon Musk speaks during the unveiling of the new Tesla Model Y in Hawthorne, California on March 14, 2019.Frederic J. Brown | AFP | Getty ImagesTesla shares rose more than 1% Thursday after CEO Elon Musk sent an e-mail to all employees saying the electric vehicle maker is close to reaching its target production numbers for the Model 3 this quarter.
The e-mail's optimistic tone helped Tesla shares turn positive for the first time in seven days. The company added over $500 million to its market cap, reaching around $34.6 billion, in early trading on Thursday.
Here's what Musk wrote to employees:
Subj. Exciting Goal!
Date: May 22, 2109
To: Everbody
As of yesterday we had over 50,000 net new orders for this quarter. Based on current trends, we have a good chance of exceeding the record 90,700 deliveries of Q4 last year and making this the highest deliveries/sales quarter in Tesla history!
In order to achieve this, we need sustained output of 1,000 Model 3's per day. Almost all parts of the Model 3 production system have exceeded 1,000 units on multiple days (congratulations!) and we've averaged about 900/day this week, so we're only about 10% away from 7,000/week.
If we rally hard, we can do it!
Thanks for your hard work
Analysts had been losing confidence in Tesla's stock during the past week as the company entered cost-cutting mode. In an email to employees obtained by CNBC last week, Musk stressed the need for “hardcore” measures to cut spending.
Citi analysts wrote Tuesday that Tesla's shares could fall more than 80% to $36, citing “lingering demand/FCF (free cash flow) concerns.” In a private call with Morgan Stanley clients Wednesday, Morgan Stanley research analyst Adam Jonas said he was skeptical about the company's ability to grow, CNBC reported.
“Tesla is not really seen as a growth story,” Jonas said on the call, which CNBC heard in a recording. Today, “It seems like a distressed credit and restructuring story.”
Loup Ventures co-founder Gene Munster gave the stock its latest downward revision Thursday. Munster expected the company would miss its delivery expectations this year especially as trade tensions drag on between the U.S. and China. He lowered 2019 delivery estimates about 10% to just 310,000 vehicles compared to guidance between 360,000 and 400,000.
While Musk's email to Tesla employees shed a light on production progress, logistics remains another challenge for the company in meeting its second-quarter delivery goals.
In the first quarter of 2019, Musk said the increase in overseas business stressed the company's logistics operations. Half of Tesla's global deliveries happened in the final 10 days of the first quarter.
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Don’t expect Apple or Amazon to buy Tesla, Morgan Stanley analyst warns investors

Elon MuskMike Blake | ReutersIn an invitation-only call with institutional clients of Morgan Stanley on Wednesday, research analyst Adam Jonas — a long-time Tesla bull — expressed skepticism about the electric vehicle maker and said not to count on a buyer like Apple to bail the company out.
“Tesla is not really seen as a growth story,” Jonas said on the call, which CNBC heard in a recording. Today, “It seems like a distressed credit and restructuring story.”
Some details of the call were previously reported by Business Insider.
Jonas spent some time on the call responding to the hope that a big tech company like Apple or Amazon might buy Tesla. in a CNBC interview on Tuesday, analyst Craig Irwin of Roth Capital Partners rekindled the rumor that Apple once made a bid for Tesla.
But Jonas poured cold water on the notion of a big tech acquisition today.
He explained, “For risk mitigation and liability containment, they may not want to expose themselves to the unlimited liability of being involved in owning a business where occasionally a car catches on fire, takes down a building, or accidentally kills a pedestrian or passenger, things that happen. The auto industry has an ugly side to it. The roads are very dangerous. There's a lot of stored energy in a vehicle. And the regulatory environment [around autonomous cars] has not had time to cure yet.”
Jonas acknowledged that Apple has interest in transportation (as do Amazon and other big tech firms). But Morgan Stanley's tech researchers, he said, don't expect Apple to have a service or related hardware devoted entirely to transportation until the 2030s.
He added, “Perhaps those big tech firms don't want to expose themselves to that up front. And moreover they realize the autonomous race is more of a marathon where over a 10- or 20-year period you collect real world miles. There may be other ways to do that besides owning a full-stack, awesome, great auto company.”
SpaceX to the rescue?Apart from shooting down the idea of a white knight, Jonas also expressed skepticism about the company's current state.
“In late 2018, demand was exceeding supply, cash flow was strong, there was a ton of excitement around the Model Y,” Jonas said. “Today — supply exceeds demand, they are burning cash, nobody cares about the Model Y.”
Finally, Jonas told investors that, given the precedent of Tesla's acquisition of SolarCity, there's a possibility Musk could use his 54% stake in SpaceX, a company that has a post-money valuation of $31.5 billion, to eventually collateralize Tesla.
“There's a precedent for Elon Musk to think across his portfolio of companies,” he said.
Jonas said near-term, Wall Street is expecting Tesla to deliver just 70,000 vehicles in the second quarter of 2019. While he and Morgan Stanley have a more optimistic estimate of 82,000 vehicles, that still falls short of Tesla guidance. The company said it would deliver 90,000 cars this quarter, and wrote in a first-quarter shareholder letter:
“Although we are driving towards higher internal goals, we reaffirm our prior guidance of 360,000 to 400,000 vehicle deliveries in 2019, representing an increase of approximately 45% to 65% compared to 2018.”
Tesla and Morgan Stanley did not immediately respond to requests for comment on the call.
Morgan Stanley was a lead underwriter in Tesla's $2.7 billion offering of stock and convertible notes, which closed earlier this month. The week of the offering, Morgan Stanley said it saw the funding as a 12-month bridge to help the company gain a foothold in China.
Tesla's stock is down 15% since last Thursday, and dropped 6% on Wednesday to under $193. The slide began last week after an e-mail surfaced in which Tesla CEO Elon Musk urged employees to cut spending and told them he would personally oversee outgoing expenses.
That news was followed by a bad Consumer Reports review of Tesla's new Autopilot Navigate feature in its Model 3 electric sedans. The stock may also be reacting to ongoing trade tensions between the US and China, as Tesla has staked its future on building and selling its cars there.
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Apple bid to buy Tesla in 2013 for $240 a share, analyst says

GP: Elon Musk, chief executive officer of Tesla Inc., speaks during an event at the site of the company's manufacturing facility in Shanghai, China, on Monday, Jan. 7, 2019.Qilai Shen | Bloomberg | Getty ImagesWith Tesla's stock sinking to around $200 this week, Craig Irwin, an analyst at Roth Capital Partners, told CNBC on Tuesday that the electric car company could have sold to Apple six years ago for a significantly higher price per share.
“Around 2013, there was a serious bid from Apple at around $240 a share,” Irwin said in an interview on “Squawk Box. ” “This is something we did multiple checks on. I have complete confidence that this is accurate. Apple bid for Tesla. I don't know if it got to a formal paperwork stage, but I know from multiple different sources that this was very credible.”
Apple and Tesla did not respond to requests for comment.
Tesla is down more than 38% in 2019, to a share price of $197.76 at the start of trading Tuesday. The stock has plunged 46% from its high in August, when CEO Elon Musk said he had “funding secured” to take the company private at $420 a share.
Knowing there was a “very credible” bid on the table in 2013 keeps Irwin from being more bearish on the stock today.
“If Apple had interest then, they would probably have interest now at the right price,” he said.
VIDEO6:3806:38Watch a Tesla analyst weigh in on Morgan Stanley's revised bear caseSquawk BoxIrwin said that Apple's car project continues to develop in secret, and that the company is building large “dry rooms” in California to do something related to automotive batteries. According to Irwin, those rooms are designed to handle the environmental containment required for the production of lithium-ion batteries.
“My checks are Apple is building several dry rooms, including a couple that are much larger than what you would need for watch or consumer product battery development,” Irwin wrote in a follow-up email.
Irwin is not the first to suggest that Apple and Tesla have held discussions. The San Francisco Chronicle reported in 2014 that Musk met with Apple's head of mergers and acquisitions and most likely CEO Tim Cook as well.
If the two companies were to combine, it would be by far Apple's largest acquisition ever and one of the biggest in the history of the technology industry. Tesla's current market cap is about $36 billion. The most Apple has ever paid is $3 billion for Beats Electronics in 2014.
For a deal to take place Apple would face the question of what to do with the outspoken Musk and his tendency to gain attention for many of the wrong reasons, whether it's tweeting out material nonpublic information or smoking weed on a podcast.
“Regarding the acquisition: my understanding is Apple wanted Elon Musk to step away, and that was a deal killer,” Irwin said in the email.
Correction: In August, Tesla CEO Elon Musk said he had “funding secured” to take the company private at $420 a share. An earlier version mischaracterized his statement.
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