
Morgan Stanley Slashes Worst-Case Price for Tesla to $10 - chollida1
https://www.bloomberg.com/news/articles/2019-05-21/tesla-bear-case-price-cut-to-10-at-morgan-stanley-on-weak-sales
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zaroth
Even Jim Cramer (famous Tesla bear that he is) took issue with this
“analysis”.

> _Setting a price target of $10 on a $200 stock "really is insane," the "Mad
> Money" host said. "How about $8? How about $12? Ten basically says, 'I want
> to get talked about. Let's talk about me.'"_

> _" If he had done $47 would we have talked about him? No, but 10. Ten is
> right in your face," Cramer said on "Squawk on the Street." "I question this
> piece of research."_

If even Cramer is willing to call bullshit on this, it makes you wonder. Is
there any duty of care in these analysis? Are they merely op-ed of another
name? Or if they are supposed to mean something, what kind of repercussions
should follow from this kind of malfeasance?

But most of all, remember the old adage, when there’s blood in the streets...

~~~
reitzensteinm
It was a "worst case" target; the malfeasance is that it was placed too high.
The equity will be wiped out if there's a restructuring. It's hard to imagine
a future where TSLA is worth a low, but nonzero amount - there is a ton of
debt first in line.

Tesla still has a non-zero risk of failing; what kind of "repercussion" do you
believe there should be for pointing this out?

In my opinion, the right way to value Tesla is to figure out the NPV of Musk's
autonomous network vision and multiply it by the chance of getting there.

It's not necessarily a bad investment, but it would be a crazy basket to put
all your eggs in to. There's a reason the 2025 bonds are currently trading at
a 9% yield...

~~~
londons_explore
If Tesla had any spare cash, surely the logical thing for them to do is buy up
those 9 percent yield bonds.

If they are still solvent on bond payout day, they have made a tidy profit. If
they are not, it doesn't matter!

~~~
zaroth
If a company can provide return on capital greater than 9%, then spending
their money to get a 9% return is not actually a good investment.

It’s more complicated than this because it’s _expected_ rate of return with
some variance, and deploying additional side-lined cash doesn’t always achieve
the same return as the previous dollars, etc. etc.

But it comes down to this; if the best thing a company has to do with its
dollars is pay down debt, they are telling you that they couldn’t think of
anything more reliably profitable or useful to do with the dollars than that.

~~~
reitzensteinm
Parent was talking about parking spare cash, so buying up bonds and selling
them as an alternative to something like a money market account. Although for
Tesla, it would be an alternative to paying down their ABL.

A company that is cash flow positive and is looking for investment
opportunities simply does not have bonds that yield 9%. Not in this
millennium.

In any case, I don't think you really hit on the reason not to do this. If you
park your working capital in your own bonds, they're going to take a haircut
when times get even worse, which is exactly when you'd be liquidating more of
them.

This could trivially turn in to an outright death spiral unless further funds
can be raised from elsewhere. Probably not the bond market!

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SeanBoocock
I wonder what underpins these sorts of targets. Tesla has 177.29 million
shares outstanding [1]. At $10/share the market cap would only be $1.77
billion. At first blush that seems like a large discount on Tesla's assets
(real estate, facilities, parts on hand, cash/cash equivalents). At the same
time Tesla is servicing $12.7 billion in debt [1].

What does $10/share represent? Why not $1 or $30? Genuinely curious about how
this sort of calculation would be made and what the assumptions are.

[1]: [https://finance.yahoo.com/quote/tsla/key-
statistics/](https://finance.yahoo.com/quote/tsla/key-statistics/)

~~~
lisper
It's all bullshit.

I once did some consulting for a very well known person in the financial
services industry, a recognized leader in the field. As part of that work I
got to see his financial "models". They took the form of the most incredibly
complicated Excel spreadsheets I have ever encountered. They were real
monsters with hundreds of thousands of rows, dozens of workbooks.

Being a software engineer, I wrote some code to reverse-engineer them. I wrote
some VB to dump all the formulas as text, and then wrote a parser and code
analyzer. The result was a real eye-opener. 90% of the formulas were dead code
that didn't actually play into the results at all. The rest was still a mess,
but when I started combing through it I discovered that even the _live_ code
didn't really matter to the results because at the end there was a "fudge
factor" that the guy just set according to his gut feel about the market, and
this was the main thing that determined the final result.

I didn't last long in that job.

~~~
dnadler
I mean, that sounds like maybe a bad or overconfident analyst, but it's a bit
extreme to declare it ALL BS because of one guy's bad models.

~~~
lisper
Financial analysts use one of three approaches. There's the "whatever my gut
tells me" approach, which is surprisingly common. There is modern portfolio
theory. And nowadays there's machine learning. And it's all bullshit. MPT is
bullshit because it uses volatility as its model of risk, which is IMHO the
wrong model. They use it because it's something they can measure and so write
academic papers about without sounding like they're just making shit up, but
volatility does not actually correspond with what most people consider the
word "risk" to mean. It also relies on the assumption that past volatility is
a reliable predictor of future volatility for a particular security, which is
often not true. And ML is bullshit because if you throw enough data at a
regression algorithm it will find _something_ that looks like a signal but
will in fact almost certainly just be a coincidence if you actually do the
statistical analysis properly.

So yes, I'm probably being a bit harsh. There are probably analysts who
actually know something, and MPF is actually not totally worthless. But "it's
all BS" is a pretty good first-order approximation.

~~~
asaph
What about the guy played by Christian Bale in The Big Short[0]? Surely his
models were not BS.

[0]
[https://en.m.wikipedia.org/wiki/The_Big_Short_(film)](https://en.m.wikipedia.org/wiki/The_Big_Short_\(film\))

~~~
nradov
The thing is, it's impossible to tell the difference between clever and lucky
even in retrospect. It's entirely possible that his models _were_ BS. Even a
broken clock is right twice per day.

~~~
foldingmoney
It's not impossible to tell the difference between a lucky guess and a well-
designed model, although in finance you can often be right for the wrong
reasons or wrong for the right reasons.

The issue is that the things you're trying to model are usually extremely
complex and dynamic, in a way that's fundamentally unlike most sciences where
the objects of analysis obey more or less immutable laws.

So it's less like trying to model where a kicked ball will land in a football
game, and more like trying to model where the ball will be after 30 seconds of
passing and running.

But Michael Burry wasn't doing that, and his models weren't wrong. He
correctly saw that the characteristics of the mortgage contracts that were
being put into MBSs invalidated the assumption of uncorrelated defaults that
were being used in the banks' and ratings agencies' models.

------
Animats
See this article on the cash flow of Uber, Tesla, Lyft, and Snap.[1] Those
guys have far worse startup cash flow than Google, Amazon, Apple, or Facebook.
Far, far worse. It's hard to think of any business in financial history with
that much cash burn up front.

Some of those guys are going to have a Chapter 11 bankruptcy haircut. They'll
probably all survive, but the investors, not so much. Tesla has to raise a lot
of money over the next few months. When the dust settles, Tesla may be a
Chinese company. Tencent is the latest big investor.

[1] [http://fortune.com/2019/05/20/fortune-analysis-the-tech-
supe...](http://fortune.com/2019/05/20/fortune-analysis-the-tech-superstars-
never-went-through-cash-like-todays-big-burners/)

~~~
tuna-piano
“When the dust settles, Tesla may be a Chinese company. Tencent is the latest
big investor.”

This is something people don’t understand about the trade deficit. Most people
think the trade deficit means that China sends the US way more stuff than the
US sends to China.

That is not true. Of course China doesn’t send stuff without asking for things
in return. China sends stuff and then has the right to buy pieces of American
companies and future cash flows of those companies (and government entities).

The US is getting a bunch of stuff and giving away little pieces of it’s
future. This is just a visible example

~~~
godzillabrennus
Then old white people voted to change that and Trumped the status quo.

~~~
robocat
There is plenty of variation within "old white people": using blatant
stereotypes is just plain offensive.

"All black people are _____" is equally unacceptable.

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sabertoothed
This is such a non-information. My worst-case price for Tesla is 0. However,
Morgan Stanley's and my base case are significantly above 0. If the price
spread of your cases is multiple hundred US dollars, you really have to ask
yourself if you're a useful analyst.

~~~
Areading314
The fact that Tesla is hard to price IS information though, The wide range
reflects that it's a high-risk bet.

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_sword
I was a wall st enterprise software equity research analyst until recently so
let me shed some light on the methodology here. The Morgan Stanley analyst
offered three target prices across his bull / bear / base case analyses, which
is a common way to publish a stress test of your thesis and analysis. The base
case analysis yields his official $230 target price, which is what he
considers to be the most likely outcome. The bull case analysis represents
where the stock could move if everything goes right (in his analysis), while
the bear case analysis represents where the stock could move if everything
falls apart (in his analysis).

The $10 TP that's been published is pretty out of the ordinary and appears
like it was published to grab the attention of his readers and the press.
Research analysts commonly will publish a controversial analysis that can be
supported by their work in order to get more investors on the phone, since
that's where commissions are generated.

This could also potentially be the MS analyst sending a message to the company
that they need to do more to address concerns around demand. This sort of
research is typically read by investor relations, and the important pieces
sent along to C-suite executives and the board.

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nradov
So what they're saying, is that depending on what happens in the future the
stock price might go up or down.

~~~
idlewords
Or, under very unlikely circumstances, stay the same.

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wpdev_63
Tesla would never go to $10 as one of the big four would immediately buy them
out if they got them wholesale. Their self driving would make it worth it
alone(looks at uber ipo).

~~~
Traster
It's never impossible for Stock to go to a certain price. Let's say for
example: December 2019 comes, in a rush to get their self-driving released by
the end of the year. They push out the 'update' and the next day 5 drivers are
dead. Engineers start to come out and whistleblow. Suddenly the self-driving
play is dead, you've got huge legal liabilities coming down on the company, an
acquisition is impossible because no company wants to write a blank check on
that liability. So Tesla's got some factories, assets, decent cars but the
prospect of self-driving is gone and everyone is waiting to see what that
looks like. That could easily see the stock sink to single digits. Eventually
the law suits would play out and it'd either go bankrupt and be picked apart,
or it'd get acquired eventually. I'm absolutely not saying this is likely, but
there are always ways a stock can get to $10.

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sidcool
I am growing really concerned about Tesla. It would suck really hard to see
Tesla go bankrupt. Regardless of Elon's antiques, Tesla is important for the
world. I personally relate to Tesla as a company that is struggling to survive
and will make it big in the future.

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yalogin
How do they define market saturation? They think all the people that will buy
a Tesla already bought it? How would they get that estimate? Also none of the
reason mentioned in the article warrants a 10 dollar worst case.

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TYPE_FASTER
> the electric car market

The size of the electric car market = the size of the car market now.

~~~
hn_throwaway_99
I'm an electric car fan, but this is silly. There are a huge number of car
buyers that would, currently, never consider an electric car.

~~~
robjan
Some countries are already planning on banning petrol and diesel powered
vehicles in the not so distant future.

~~~
dtparr
Unless those countries comprise the entire market for new cars, I'm not sure
that really refutes his point.

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m0zg
I'd say the truly worst case would be zero, and delisting. I don't think it'll
come to that, though. Tesla is basically the best thing to happen to the car
industry in the last hundred years or so, it'd be a real shame if it crapped
out.

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ycombonator
Just a simple question from equity markets ignoramus. How does a stock value
affect the company when the shares are already sold ? (Other than some shares
are held by Musk and employees)

~~~
memmcgee
It affects a company's ability to raise future money. In the case of Tesla,
Musk and his other projects are heavily leveraged on his $TSLA shares. There's
a very real house of cards that could come falling down in Musk-land if TSLA
drops too much.

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option
I remember how few years ago when TSLA

