Tesla Bull Adam Jonas Cuts Rating Due to SolarCity Deal Risk

Why Tesla Wants to Take Over SolarCity
  • Morgan Stanley analyst reduces price target to $245 from $333
  • Stock plunged to below $200 after acquisition annnouncement

Morgan Stanley’s Adam Jonas, one of the most bullish analysts on Tesla Motors Inc., joined the ranks of those who have panned Elon Musk’s $2.86 billion proposal to combine the automaker with solar-panel provider SolarCity Corp.

Jonas, whose firm has underwritten securities offerings for Tesla, lowered his recommendation on the stock Thursday to equal-weight from overweight and reduced his 12-month target for the stock price to $245 from $333.

“While there may be any number of lucid arguments supporting the strategic rationale of a combination, we believe many of the benefits could have been achieved through arm’s length/strategic partnership and without the risks inherent in exposing Tesla shareholders to the financial and capital markets risks faced by SCTY,” Jonas wrote in a report to clients.

Tesla shares sank 10 percent yesterday to $196.66 after Musk announced plans to bid for SolarCity. The billionaire is the largest shareholder in both companies, prompting analysts and investors to say the deal was problematic from a corporate governance perspective.

Jonas built his previous optimistic view in part on the assumption that Tesla planned to introduce an app that would get it into ride sharing, competing with the likes of Uber Technologies Inc. and Lyft Inc. Eventually, Tesla’s self-driving car technology would make ride sharing a more profitable business, according to his view. Tesla has not yet announced plans to develop such a business, which Jonas named Tesla Mobility.

In his latest report, Jonas said his new, lower price target reflects the fact that Tesla has not discussed the app, which makes timing of the business difficult to forecast.

The revised price target “incorporates our view that while a mobility app is likely to be announced within 12-18 months, there is a degree of uncertainty as to if, when and how this product unfolds and how much the market will pay for it,” Jonas wrote.

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