Elon Musk’s on-again, off-again quest to acquire Twitter has already cost Tesla shareholders a fortune this year, but the pain won’t stop there.
His chaotic reign over the social media platform has soured investor demand for Tesla stock so thoroughly that Morgan Stanley fears it could wipe another quarter off its value in the coming weeks.
In a research note published by the investment bank on Monday, veteran auto industry analyst Adam Jonas warned Musk’s management style could deter consumers from buying his cars and predicted price cuts for its key domestic market.
“Tesla shares are currently in the throes of bearish sentiment momentum,” wrote the longtime Tesla bull, predicting Tesla could test his $150 bear case price target before the year is out.
Musk has dumped billions of dollars worth of Tesla stock on an unsuspecting market in an attempt to finance the deal, most recently at the start of this month.
In a sign that investors may be losing patience, the stock sold off last Wednesday, closing down 7.2%.
Bulls had been hoping the company would confirm this week the dramatic underperformance was mainly the result of Musk’s selling more shares, but they were disappointed.
Having spoken to a number of investors, Jonas believes confidence in Musk’s leadership at Tesla has been tested owing to the nonstop drama at Twitter, with both consumers and business partners potentially turning their backs on the EV industry leader amid the controversy.
“We would prepare for price cuts [in China] to follow in Europe as Giga Berlin begins to surpass production of 5,000 units per week,” he continued. “And we would expect U.S. price cuts to be initiated sometime in the first half of 2023.”
Tesla has been rapidly expanding its production footprint over the course of this year, opening two new plants in Texas and Germany in addition to installing fresh new capacity at its largest factory, Giga Shanghai.
These expansions have helped reduce long lead times for delivery, but now there is the risk that Tesla suffers from excess capacity.
Weakness an opportunity
U.S. customers ordering a custom-built Tesla Model 3 sedan or Model Y Performance crossover today will get theirs delivered before December is out, according to the carmaker’s Design Studio.
With the time it takes to incorporate an order into its production plans and subsequent delivery time, this suggests Tesla’s order book cushion in the U.S. may be nearly exhausted.
If Tesla was starting to see demand slide enough that new billings fell short of outgoing deliveries, it could choose to cut prices just as it has done in China last month. This would mean it may have to sacrifice its industry-leading automotive gross margins of near 30%.
That’s because a major reason for its high profitability is its efficiency.
Roughly 90% of Tesla’s auto sales come from one architecture shared by both the Model 3 and its closely related Y sibling that boasts many of the same parts.
This makes Tesla unique—no major carmaker apart from Tesla is so thoroughly dependent on two nearly identical models. Most seek to plaster the market with offerings in all core segments and body styles. This results in higher complexity and lower returns.
Morgan Stanley’s Jonas, who maintained his “outperform” rating on the stock, has had a difficult past few weeks. Already twice he was forced to cut his base case price target last month: first from $383 down to $350 and then once more to its present $330.
Nevertheless he recommended Tesla bulls use any weakness to add to their position.
“Any resulting weakness in Tesla shares could create an opportunity for investors,” he wrote.
Shares in Tesla were trading up 4.7% to $200 on Tuesday as the market rallied on lower-than-expected factory gate inflation figures.