Autos

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

When you've already jumped the shark, it is tough to try and jump back over it in reverse. But Morgan Stanley's Adam Jonas is attempting it with his price target on Tesla Motors.

Cutting that target from $450 to $333 on Monday didn't seem to faze investors: Tesla's stock rose 3.5 percent to about $197 in response. That may be because it looks like a lagging indicator: Tesla's shares are down by more than 20 percent since mid-August, when Jonas raised his target from $280 to $465, pulling up more than a few eyebrows along with it.

Off Target
Tesla's shares had been going in the opposite direction of Morgan Stanley's price target.
Source: Bloomberg

More interesting than the change in the headline price target, though, is what goes into it. Morgan Stanley's valuation for Tesla isn't actually its base case but rather the average of its base case and bull case, so it is inherently skewed toward a more optimistic take on the company's prospects. Thus, that shark-defying price target in August represented the midpoint between a base case of $319 and a bull case of $611 (the latter implying a valuation of around $89 billion, or almost double Ford Motor's current market cap).

Most of the action has been in the bull case, which has dropped by almost $200 a share -- roughly the same as Tesla's entire valuation currently -- to $413.

More than half of that decline relates to reining in expectations for something called Tesla Mobility, an Uber-like autonomous vehicle-hailing service that exists, in public anyway, mostly in the pages of the Morgan Stanley reports on Tesla that have been published over the past six months. Concerned about rising competition, exemplified by such recent developments as the General Motors-Lyft partnership, the valuation for that theoretical Tesla arm is now just $129 a share compared with $244 in August. Meanwhile, the bull-case valuation for Tesla Energy, a real but very nascent energy-storage business, has also been slashed, from $89 in August to $49 now.

If you want a good definition of froth, a price target jumping by two-thirds largely due to expectations around businesses that either barely exist or don't at all, and then being cut by almost 30 percent all in the space of less than six months is a pretty good candidate. Even now, a quarter of Morgan Stanley's new target for Tesla relates to upside in the storage business and launching a successful robo-vehicle venture. More broadly, the median analyst target of $284, according to data compiled by Bloomberg, remains more than 40 percent higher than where Tesla trades today.

Pedal to the Metal
The spread between the median analyst target and Tesla's stock price has grown.
Source: Bloomberg

Apart from the obvious risks in taking such blue-sky modeling at face value, it can also distract from what is happening at Tesla's core operations. As part of Monday's cut, Jonas also took down his base case valuation on the main vehicle business. At $234, it is still higher than today's stock price, but down a bit from where it was in August -- mostly because of expected production delays, rising costs and the challenge of $30 oil.

Indeed, rather than the headline target, if investors are going to pay any attention to such valuations, they should keep an eye on this core one. Tesla's fortunes rest overwhelmingly on how well it does at merely trying to reinvent the motor car.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net