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Morgan Stanley Slashes Worst-Case Price for Tesla to $10 (bloomberg.com)
41 points by chollida1 25 days ago | hide | past | web | favorite | 65 comments

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...

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...

Exactly, and your post made me realize why Cramer is totally correct. Of course the worse case scenario is $0 - I don't think anyone really doubts there is a significant, non-zero possibility of Tesla going bankrupt. But saying that wouldn't get you in the news, so this analyst pulled the $10 number out of his ass to make it more newsworthy than just "Tesla could go bankrupt."

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!

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.

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!

Jim Cramer also suggested people should buy as much Lyft stock as they can (https://www.thestreet.com/video/get-lyft-when-ipos-jim-crame...).

With his long history of bad calls, there's no reason to give any more credit than he deserves.

I was about to say. I know plenty of onvestors watching him. Some with around $500MM in managment. None is takin advice from Jim, they watch him for entertainment. You can learnt AT tho.

Jim Cramer is a TV personality. It's also established that he has in the past used his media presence to pump and dump stocks.[1] Whilst he may be right that what this analyst is doing is picking a number that makes a headline, this tells you nothing about whether the underlying analysis is right. Whatever motivation this analyst has, you can be certain that Cramer also has the same motivations - as do almost any serious set of investors you speak to.


I don't think I understand Cramer's argument. Is he asserting the new worst-case valuation is disingenuous because it's a "nice" number like 10?

Does that mean he wouldn't be saying anything about it if it were 11 instead? That seems like just as subjective an assessment as the one he's currently making. A seemingly "random" looking number can be just as arbitrarily chosen as a neat looking one.

It wouldn't surprise me to know analysts like to slightly round up or down a valuation target to hit a neat number like 10. But that seems like human nature to me, not a lack of integrity or critical analysis. I don't think this is a very critical heuristic to use...

No, I think what he's saying is that the analysts are massively low-balling the valuation in order to gain attention. He compares it to $47, which would be low, but would represent only an 80% drop. $10 means TSLA has had 95% of its value wiped out, it's just absurd.

Ah, okay. That makes a little more sense to me.

Just because it’s really low doesn’t mean Ten is wrong. There’s plently of examples of securities that have been mispriced to such a degree (i.e Enron and MBS).

> when there’s blood in the streets...

This applies more to the entire market or particular industries than it does to specific stocks. There are many stocks whose charts look "bloody" because they are bad businesses. Not all of them go on to make a miraculous recovery, many simply find themselves trading on the pink sheets.

That analyst was not even very good at drumming up publicity. If he wanted to draw attention with a low price target, he should have picked… $4.20

"However, Jonas kept his main price target for the stock at $230 and also has a bull-case forecast of $391"

That seems like strong supporting evidence that the $10 number is truly just to stir the pot to grab some headlines.

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/

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.

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.

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.

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)

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.

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.

They uncovered the large systemic threat with credit default swaps and made a bet.

What was the unit of analysis? Stock, sector, index, market, world?


Well, bonds are incredibly macro-sensitive, so when the course of the world economy can be upturned by one Trump tweet (or whatever) then yeah, a super complicated model that you throw away and replace with a fudge factor sounds like about the right way to model it.

IME analysts build models and use them over and over again, so depending on the modeled company, much of it may not have been active.

100% I've seen the same thing. But they think they're all brilliant masters of the universe. Frightening when you think on how common place that is in the industry. That said, I do believe that the larger firms have begun to evolve away from that.

Firms in finance run the gamut from being breathtakingly stupid to scarily smart. Since the financial crash things have changed a lot (less stupid guys) though.

Survivor-ship bias. Helluva way to make money.

I mean surely you don’t think Goldman Sachs, Morgan Stanley, JP Morgon, etc are still around because of survivorship bias? That is, everyone is just flipping coins and some people got lucky.

If you think that’s true, the natural correlary is that all companies are just flipping coins.

Those firms make most of their profit most years from fees, not trading for their own accounts.

I can't find the note, only the same quotes from it.

I imagine the basic assumption is that if the market is tapped out, revenues will slow, plateau and then begin to fall before Tesla reaches sustained profitability. That means debts will begin to grow again.

Current book value is about $26 a share, of which about $12 is cash on hand. If debt remained constant but no new cash came in, book value goes to $14 at the moment of bankruptcy. Discounting for "bankruptcy really sucks for shareholders", $10 is a fairly defensible worst-case.

It's typically done by estimating future earnings that "belong" to shareholders, and then computing the current value of those earnings.

That's a dramatically over simplified explanation, though. Look up divided discount model (DDM) and discounted cash flows (DCF) for more info. There are other methods as well, but most rely on the same principals.

If you are interested in such topics you can read up on valuations in a corporate finance book. With high growth companies like Tesla the majority of the valuation comes from expected future growth. If the expected growth changes the valuation can be dramatically different.

Basically what assets it has like inventory, PP&E, IP, etc. less any debt or liabilities the company has. Typically that sets the bottom range of value. In more distressed situations you would assume the assets are slowly destroyed by the company over time as it continues to operate and wastes the asset before they can be sold.

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...

“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

Forgive my ignorance, but how does the trade deficit in favor of China necessarily entitle China to acquire ownership of US companies? The best explanation I could think of is that China is using the liquid capital obtained by US trade to turn around and purchase ownership stakes in US companies the same way pretty much anyone within the US would, which means there’s no special arrangement outside of China having money to spend and the US being in need of investments.

If my hypothetical explanation is correct then the implicit goal of “fixing the deficit” ends up reading as ultimately somehow ensuring China has less money, and just that China has less money, when I think that the legitimate national security concerns around the trade deficit would be better addressed by some actual investment oversight.

But, again, maybe there’s something about the deficit entitling China to stakes in US companies that I’m not seeing.

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

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

"All black people are _____" is equally unacceptable.

> When the dust settles, Tesla may be a Chinese company. Tencent is the latest big investor.

I'm sure, and hope, that the US regulators will block that from happening.

(IANAL) How exactly would US regulators just take Tencent's stock away? Would the US government buy it from them? Is there precedent for just telling them the stock is useless paper and would that not discourage foreign investment in US companies?

They don't need to do anything till tencent doesn't hold majority stake in it. Any stock buyouts that will result in majority shareholdings will need regulatory approval (in many countries that is the case )

Tencent's equity will get wiped out as well, and I doubt they're going to invest more into it after that.

Also I'm pretty sure CFIUS will block it anyway.

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.

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

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.

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

Or, under very unlikely circumstances, stay the same.

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).

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.

Indeed, who would not buy into +12B$ debt, ongoing liabilities, unreliable cars and collapsing demand ?


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.

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.

> the electric car market

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

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.

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

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

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.

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)

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.

I remember how few years ago when TSLA

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