There was a time when Morgan Stanley analyst Adam Jonas thought shares of Tesla Motors Inc. would nearly double. But after CEO Elon Musk presented a $2.86 billion plan to combine Tesla and SolarCity Corp., the analyst is drastically cutting his price target and downgrading the stock.
Jonas, who'd had an overweight rating on shares of the electric vehicle company since September 2012, is lowering the stock to equal weight and taking his price target to $245 from $333. His target had been as high as $465 late last year.
Until May, Jonas had the highest price target on shares of Tesla among analysts surveyed by Bloomberg. The average price target is now $266.86, with a range from $145 to $500. The stock closed at $196.66 on Wednesday.
"The 26% reduction in our price target is mostly driven by a higher risk premium we believe should be demanded by investors following the surprise proposal to acquire SolarCity," Jonas wrote. "Additionally, we have marked-to-market our discounted cash flow and earnings model to fully reflect the impact of the capital raise and exercise of stock options by Musk in May."
A constant refrain from the analyst over the years was that Tesla is much more than a vehicle manufacturer, saying it would disrupt multiple industries. In the past, Jonas had mused that Tesla would create a fleet of self-driving electric cars that would not only see the company take market share from traditional gasoline-fueled automakers but also bring it into competition with upstarts like Uber Technologies Inc. and tech powerhouses like Alphabet Inc.
In recent months, the analyst's enthusiasm over the lofty heights shares of Tesla could ascend to started to dim.
In October, he cut his price target and indicated that sales volumes for Tesla's SUV would struggle to live up to expectations in light of the vehicle's high price. At the start of February, he further trimmed his target price, citing production challenges the company was facing.
An acquisition of SolarCity Corp. would not help the electric vehicle manufacturer make better cars, improve the company's cash position, or improve its access to capital to fund growth projects — the three major drivers of Tesla's stock price, according to Jonas.
“While there may be long-term commercial and strategic rationale for combining (Tesla) and (Solar City), the opportunity may not adequately compensate (Tesla) investors for the added risk/cash consumption,” he wrote in a research report. “Moreover, we don’t believe (Solar City) will help (Tesla) make better cars. Downgrade to EW.”
Perhaps more so than his peers, Jonas has had a penchant for taking the longest possible view on Tesla's evolution as a company, often asking about hypothetical opportunities for the company that certainly wouldn't factor into its financial performance over the next few quarters.
He now joins a plethora of Wall Street analysts covering SolarCity or Tesla who have cast doubt on the merits of the deal for either side, and cautioned that it may not go through.
"While we remain bulls on the solar industry, we do not view this acquisition as the best and highest use of TSLA’s capital and human resources," Oppenheimer & Co. analyst Colin Rusch wrote.
"We are cautious on the deal as synergies seem limited, it adds complexity, and most importantly it could potentially be an unneeded distraction for Tesla management," added UBS Ltd. analyst Colin Langan.
By Luke Kawa, Julie Verhage and Arie Shapira