Tesla is raising $2.7 billion in fresh capital but that is only "a 12-month bridge," as Elon Musk's electric vehicle company needs to begin manufacturing and selling its lower-priced cars in China, Morgan Stanley said on Monday.
"Increased dependency on China and robotaxi undermines the resilience of the Tesla investment story," Morgan Stanley analyst Adam Jonas said in a note to investors. Jonas, who is widely followed for his early calls on Tesla and electric vehicles, has become increasingly cautious in his opinion of the company.
Demand is "still the #1 challenge facing the company," Jonas said. Tesla reported a larger loss than expected in the first quarter as total vehicle sales fell 41% from the previous quarter. The $2.7 billion raise is a "stop-gap" then for Tesla, Jonas said, and some of Morgan Stanley's estimates for Tesla's cash on hand run "uncomfortably low" from quarter to quarter in the coming year. While the amount raised was about what Morgan Stanley expected, the capital infusion came a quarter earlier than the firm thought it would.
Morgan Stanley's estimates "are prepared for Model S and X demand to remain extremely weak throughout the year," Jonas said, as "the models are still rather old and face cannibalization risk from the ever-growing second-hand population of Teslas."
To that end, Tesla's own ambitious sales targets will require success in both manufacturing and delivering cars in China, according to Morgan Stanley. Jonas said the firm's team in China "is extremely constructive on the outlook for Tesla to gain share with a domestically sourced Model 3 and Model Y."
"We believe the 2019 airpocket on Model 3 demand may largely continue until an affordable locally-produced Model 3 is available in that market," Jonas said. "At this stage, we do not anticipate significant Model 3 deliveries in China until 1Q 2020 at the earliest."
But that relies fully on whether Tesla can get its manufacturing up and running in Shanghai.
"We continue to have concerns on the long-term viability of a US player in the Chinese EV market," Jonas said. "While we give Tesla credit for tapping into the world's largest EV market for a number of years, we would not pay a particularly high multiple for earnings derived from this region as we strongly suspect a host of national champions to emerge."
Even if Tesla does succeed in China, Morgan Stanley highlighted trade tensions with the U.S. as a risk if "Tesla's dependency on China increases," Jonas added.