JPMorgan: Okay, Fine, Short Tesla

Ryan Brinkman sees 2018 as Tesla's annus horribilis.
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We like to talk about Tesla as less of a publicly traded manufacturing company and more of a new-age religious experiment. While Tesla does technically produce cars, Elon Musk's main product is mass techno-futurist delusion.

Tesla Bubble

Amazingly, Wall Street hasn't been completely immune to the spell of Musk. Morgan Stanley's Teslaphile auto analyst Adam Jonas has been a particularly loyal adherent, so much so that he seems to think he knows Elon better than Elon knows himself. Other analysts have ventured even farther into the Tesla abyss.

JPMorgan is not having it. In a note released Friday, analyst Ryan Brinkman recommended pulling a Chanos on Tesla, whose stock he expects to fall 40 percent in 2018 (price target $185). Here's why:

We see a high probability of a dilutive capital raise to support aggressive capacity expansion and other long-term investments, including new challenges such as the Tesla semi-truck or Roadster 2.0 before successfully ramping Model 3 production. Meanwhile, TSLA will face several milestones in 2018 relative to the ramping of production of the Model 3, which we believe will be difficult for the company to meet, particularly if its substantial miss to volume targets in 2017 are to be any guide.

If you've only been watching Tesla's high-glamor diversion attempsproduct unveilings, you might have missed some of the dreadful headlines Brinkman is gesturing to here. There's been the Model 3 manufacturing hell: Tesla employees doing by hand work meant for robots, making routine post-assembly repairs on faulty vehicles, and basically slapping the cars together on the fly. Accordingly, Model 3 production has missed basically every target Musk has promised.

But that's all just Tesla being Tesla. A separate issue looms increasingly large in the coming year – namely, the fact that other car manufactures, which happen to be profitable enterprises, do also exist:

Additionally, competition for electric vehicles will increase in 2018 even as the regulatory environment in the United States (TSLA’s largest market) may become less of a tailwind, including possible tax law changes and exhaustion of the $7,500 US federal tax credit available to buyers. One of our principal concerns relates to how Tesla is going to be able to earn even an industry average EBIT margin (let alone guidance for materially higher) if it must compete against competitors that are pricing electric vehicles without even the intention to make money, but rather to subsidize the rest of their lucrative internal combustion engine portfolios from a legal and regulatory compliance perspective.

Volvo, Nissan and Audi all have what they hope to be Tesla-killers slated for rollout in 2018. GM has even promised what has heretofore been unthinkable for Tesla longs: an “electric vehicle portfolio that will be profitable.” But even if they don't make money, these automakers' other offerings still will. That contrasts with Tesla, whose cars are loss-leaders for its solar products, which are loss-leaders for...uh, hats? The whole company is one big loss-leader.

JPMorgan's short call will not endear the bank to Musk, who has his children curse the names “Chanos” and “Einhorn” every night after praying to the Holy Spirit of the Singularity. From the outside, it would seem unwise to antagonize an executive with a growing stable of different companies and a penchant for spontaneously merging them. But look back at the infamous Tesla-SolarCity deal and you'll find that JPMorgan was not among the participants, nor any major bank. So why not finally call bullshit on Tesla?

The only major factor the JPMorgan call doesn't address is the all-important psychological one. Tesla's price isn't supported by fundamentals; it rests on hope. The stock will only fall when enough of Musk's diehard followers awake from their dreamlike stupor and see Tesla in the cold, hard light of day. Until then, stormy weather for shorts.

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