Morgan Stanley’s Tesla Analyst Will Make You Forget Goldman’s Call

High Hopes for Tesla: Looking at Analysts, Underwriters
  • Archambault upgrade to ‘buy’ came as Goldman named underwriter
  • Adam Jonas’s share target for Tesla dwarfs his competitors’

Before Patrick Archambault, there was Adam Jonas.

Archambault raised eyebrows last week when he upgraded Tesla Motors Inc. to “buy” from “neutral” the same day it was announced that his firm, Goldman Sachs Group Inc., would co-manage with Morgan Stanley the sale of $1.4 billion in new Tesla stock.

But Archambault’s call, which the bank says was made independently of the underwriting team, is overshadowed by years of optimism lavished on the carmaker by Jonas, Morgan Stanley’s lead auto-industry analyst.

The last time Tesla sold shares, in August, the company hired Morgan Stanley as one of the lead managers of the $783 million offering, priced at $242 a share. Three days after the announcement, Jonas raised his estimated future price for the stock to $465 from $280.

Jonas’s rationale: Tesla’s self-driving electric cars could help create a ride-sharing business that would make the company a major player in the industry.

Tesla doesn’t have a fully functional self-driving car, at least not yet, and hasn’t said anything about starting a ride-sharing business. If it does, it’ll have to contend with Google, which has a jump on driverless technology and a stake in ride-sharing leader Uber Technologies Inc.

Tesla shares rose 7 percent to $260.72 in the two days after Jonas’s report. Lauren Bellmare, a Morgan Stanley spokeswoman, declined to comment for this story.

According to securities law, a figurative wall must keep researchers and underwriters from working in concert. When it comes to the two analysts, there’s no indication of any breach. And Tesla stock has risen as high as $286 after a $17-a-share initial public offering in 2010.

Regulators fear that coordination might result in analysts boosting a stock so their colleagues in sales could get a higher price. A scandal in the early 2000s, following the dot-com roller coaster, caused analysts such as Henry Blodget, who was found to have opined about certain stocks differently in public than he did to members of his firm, to be barred from the securities industry.

The wall between analysts and underwriters can sometimes make for odd timing. Both groups like going to market soon after the most recent earnings release, and because one group isn’t aware of what the other is doing, there’s the risk of coincidence.

“Whenever you see a bank involved in underwriting and you see a string of positive reports, people tend to ask questions,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “But they do disclose all of this, so buyer beware.”

Leslie Shribman, a Goldman Sachs spokeswoman, said the bank followed all standards and policies with respect to the separation between research and sales. Goldman Sachs is the 11th-largest shareholder in the carmaker with about 2 percent of the company. Tesla spokesmen didn’t return e-mails seeking comment.

Underwriting Team

Touting Tesla for its potential to disrupt the car and battery markets or because of Elon Musk, its visionary leader, is one thing. Being smitten by the numbers is another. Tesla has turned a profit in just one quarter and is diluting its stock to raise the money to get its Model 3 sedan to market. Tesla’s revenue was $4 billion last year. At $216 a share, the Palo Alto, California-based company has a market value of more than $30 billion -- triple that of Fiat Chrysler Automobiles NV. By comparison, General Motors Co. will make close to $9 billion in net income this year and is worth about $47 billion.

Though Jonas is far from the only analyst cheering Tesla, he does tend toward the big price move. Even Archambault, with his $250 estimate, is nowhere near Jonas’s $333. A handful of analysts from boutique firms have higher targets than that, but among Wall Street banks, Jonas is tops. Neither Jonas nor Archambault ranks among the five most accurate forecasters of the stock, according to data compiled by Bloomberg, and Tesla shares have never come close to Jonas’s lofty target. The top two forecasters from major banks, Colin Langan of UBS AG and Ryan Brinkman of JPMorgan Chase & Co., have price targets of $160 and $185, respectively.

Target Doubled

Jonas wields market influence. His report on Feb. 25, 2014, moved Tesla shares 14 percent when he doubled his price target to $320 and wrote that the company’s batteries could change both transportation and the power-utility businesses.

That wasn’t the first time he doubled his target. Tesla reported its first-ever quarterly profit on May 9, 2013, sending the stock up 38 percent in two days. On May 14, Jonas more than doubled his target price to $103 a share and the stock rose about 10 percent in the next two days.

That same May 9, Archambault raised his share price target to $61 from $45. Within eight days, Tesla sold $360 million in stock with Goldman Sachs as underwriter and $600 million in convertible debt with both firms underwriting.

Three months later, on Aug. 8, Jonas raised his target price again, to $149, when Model S sales exceeded expectations and the shares rose 14 percent in one day. At that point, Tesla stock had been rising and Jonas’s targets tracked pretty closely to the stock.

Sold Shares

From the first quarter of 2013 to the first quarter of 2014, Morgan Stanley Investment Management sold nearly 2 million shares while Jonas’s target went to $320 from $47 a share, according to data compiled by Bloomberg.

“That’s what you would want to do,” said Maryann Keller, who has her own auto-industry consulting firm in Stamford, Connecticut. “You want to sell into the hype when the shares are going up so you can profit from the froth.”

In February 2014, within three days of Jonas doubling his target to $320, Tesla priced a $2 billion convertible debt offering with Morgan Stanley and Goldman Sachs as underwriters.

Spirit of Law

“The spirit of the law was compromised,” said Doug Kass, a columnist for TheStreet.com who bets against Tesla stock as president of hedge fund Seabreeze Partners Management.

Tesla shares are down 9.9 percent this year. Morgan Stanley Investment Management has continued selling. In the first quarter, it dropped its holding to 3.8 million shares.

And Jonas? Still optimistic.

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