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.

It's hard to predict the future, especially when it keeps changing so quickly.

Take Tesla Inc., for example. Earlier this week, Morgan Stanley analyst Adam Jonas published a report titled "Tesla 2018: $400 then $200?" -- which, as you might expect, predicts a volatile time for the stock next year. As prognosticating goes, this isn't a stretch; a retrospective of this year could easily be titled: "Tesla 2017: $200-ish, $400 (almost), $300 (or thereabouts)".

The Prequel
Tesla's stock has already had a pretty wild and crazy 2017
Source: Bloomberg

Morgan Stanley's report was more interesting for the volatility in its forecasts. Start with how many Model 3 vehicles Tesla will deliver this quarter: This has been cut from 10,000 to 1,000. Slashing any forecast by 90 percent when you are already halfway through that quarter is obviously not something done lightly. To be fair, though, those Model 3s have been fiendishly hard to pin down; the chart below sets those forecasts in some context:

Next Year's Model
The latest estimate suggests Tesla's Model 3 deliveries in 2017 will be 1 percent or less of its original guidance
Source: Tesla, Morgan Stanley, Bloomberg Gadfly analysis
Note: Morgan Stanley's November 2017 estimate adjusted for actual deliveries in the third quarter. Gadfly estimates based on company guidance at those times.

Needless to say, the financial model has taken a bit of tweaking, too. Morgan Stanley now expects Tesla to lose $1 billion at the operating level next year, not the $688 million loss forecast previously, and Tesla flips from positive operating profit across the next three years to a loss.

This is a truly well-worn path; consensus forecasts for Tesla tend to go through a cycle of rampant optimism followed by growing despair as earnings day approaches. Also striking is just how divergent those forecasts are. Here's the spread between the high and low estimates for Ebitda and free cash flow over the next couple of years, as compiled by Bloomberg:

Model 3x
Forecasts for Tesla vary widely, with the highs and lows even for next year different by a factor of three
Source: Bloomberg

Part of the problem here is that Tesla is doing something new -- building electric cars, among a growing pile of other things -- while also doing something old: setting unrealistic targets that it fails to meet. There is a constant promise of sublime transformation in technology, society and, along the way, profitability. This provides the long-term antidote to short-term disappointment, keeping Tesla's market cap north of $50 billion.

This is apparent in Morgan Stanley's valuation. Despite slashing profit forecasts for the next three years, those beyond 2020 have been trimmed by a mere 5 percent. And even then, the price target of $379 a share, based on two discounted cash flow models, hasn't changed. Implicitly, even more emphasis has shifted toward that sublime terminal value.

While on the subject, it's worth remembering how that valuation was raised from $317 to $379 a share in October (adding a cool $10.4 billion in the process). First, the exit multiple on Tesla's vehicle business was tweaked higher. Second, the discount rate on "Tesla Mobility" -- a mooted autonomous ride-sharing business -- was tweaked down. In other words, the terminal value was jacked up for Tesla's core business and the same favor was granted to every dollar projected to come from a business which, at this point, exists largely within the confines of financial models.

As of now, all that really matters is whether Tesla can finally start cranking out those Model 3s. On this point, Jonas maintains his forecast of 120,000 next year; far below Tesla's original guidance of half a million, but still a challenging figure, given progress to date. As the report says:

It is our working assumption that Tesla’s battery module production bottlenecks may be resolved in weeks. It is not possible to prove precisely when problems with zone 2 [production line] will be overcome, if they ever are at all. There is only evidence that Tesla is throwing its human and financial capital at the problem.

This is the fulcrum of that $400-then-$200 scenario. As evidence of Tesla fixing its production line emerges, this could fuel another spike in the stock. But beyond this, the report warns, realization of growing competitive threats to Tesla could take it back down quickly.

It's plausible enough as a scenario. As an investor, though, what do you do with it? Surf the sentiment wave and buy in expectation of that four-handle only to then get out before it halves? Or trust in that $379 figure, despite the fact that it rests largely on cash flows projected to be more than a decade away in that ever-more-competitive future that's going to force a sell-off? Maybe just embrace the volatility and get some options action going?

Among the noise, the clearest signal is for Tesla itself. Burning cash at a ferocious rate as it throws its "financial capital at the problem" of the Model 3, the company could potentially use another infusion.

So if Tesla buys the notion that its stock could jump by a third and then maybe drop by half, it may be minded to tap the market again sooner rather than later. You can almost see it coming.

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

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

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net