The bulls pre­dict­ing a rise in Tesla’s stock come un­der scru­tiny

An­a­lysts ▶ The com­pany has big fans at banks it also does deals with ▶ Rules split an­a­lysts and sales, but “peo­ple tend to ask ques­tions”

Bloomberg Businessweek (North America) - - Contents - �David Welch

Be­fore Pa­trick Ar­cham­bault, there was Adam Jonas.

Ar­cham­bault, an an­a­lyst at Gold­man Sachs, raised eye­brows with his May 18 up­grade of Tesla Mo­tors from a rat­ing of neu­tral to buy. Later that same day his com­pany an­nounced it would co­man­age with Mor­gan Stan­ley the sale of $1.4 bil­lion in new Tesla stock.

But Ar­cham­bault’s bullish call, which the bank says was made in­de­pen­dently of the team un­der­writ­ing the stock deal, pales in com­par­i­son with the op­ti­mism of Jonas, the lead auto an­a­lyst at Mor­gan Stan­ley.

The last time Tesla sold stock, in Au­gust 2015, the maker of elec­tric cars hired Mor­gan Stan­ley as one of the lead man­agers of the $783 mil­lion of­fer­ing, priced at $242 a share. Three days af­ter the an­nounce­ment, Jonas raised his es­ti­mated fu­ture price for the stock to $465, from $280.

Jonas’s ra­tio­nale: Tesla’s self­driv­ing cars could help cre­ate a ride­hail­ing busi­ness that would make the com­pany a ma­jor force in that in­dus­try. Tesla doesn’t have a fully func­tional self-driv­ing car, at least not yet, and hasn’t said any­thing about start­ing a ride-hail­ing busi­ness. If it does, it will have to con­tend with Google, which has a jump on driver­less tech­nol­ogy and a stake in ride-hail­ing leader Uber.

Even so, Tesla shares rose 7 per­cent, to more than $260, in the two days af­ter Jonas’s re­port. Lauren Bell­mare, a Mor­gan Stan­ley spokes­woman, de­clined to com­ment for this story.

Ac­cord­ing to se­cu­ri­ties law, a fig­u­ra­tive wall must keep re­searchers and un­der­writ­ers from work­ing in con­cert. Reg­u­la­tors want to make sure that an­a­lysts aren’t boost­ing stocks to help out col­leagues in sales. In the early 2000s an­a­lysts such as Henry Blod­get got into trou­ble for talk­ing up stocks in pub­lic while shar­ing rather dif­fer­ent opin­ions within their com­pa­nies. Blod­get was barred

from the se­cu­ri­ties in­dus­try. When it comes to Ar­cham­bault and Jonas, there’s no in­di­ca­tion of any breach of that wall. And some bullish­ness on Tesla has proved to be war­ranted: The stock has risen as high as $286 af­ter a $17-a-share ini­tial pub­lic of­fer­ing in 2010.

Coin­ci­dences of tim­ing can cer­tainly hap­pen, es­pe­cially since both an­a­lysts and un­der­writ­ers are likely to act soon af­ter a com­pany’s most re­cent earn­ings re­lease. An­a­lyst re­ports also must dis­close when a firm was in­volved in a pub­lic of­fer­ing.

“When­ever you see a bank in­volved in un­der­writ­ing and you see a string of pos­i­tive re­ports, peo­ple tend to ask ques­tions,” says Charles El­son, di­rec­tor of the John L. Wein­berg Cen­ter for Cor­po­rate Gov­er­nance at the Uni­ver­sity of Delaware. “But they do dis­close all of this, so buyer be­ware.”

Leslie Shrib­man, a Gold­man Sachs spokes­woman, says the bank fol­lowed all stan­dards and poli­cies sep­a­rat­ing re­search and sales. Gold­man Sachs is the 11th-largest share­holder in the car­maker. Tesla spokes­men didn’t re­spond to e-mails seek­ing com­ment.

Tesla ex­cites many in­vestors be­cause it’s a po­ten­tial dis­rupter of the auto and bat­tery mar­kets, and many see its founder, Elon Musk, as a vi­sion­ary. On the other hand, it’s notched just one prof­itable quar­ter and is di­lut­ing the value of its stock by is­su­ing shares to raise money to launch its Model 3 sedan. At its cur­rent price of about $220 a share, the mar­ket al­ready as­signs Tesla a to­tal value of $30 bil­lion, triple that of Fiat Chrysler Au­to­mo­biles, which has about 30 times the rev­enue.

Jonas’s 12-month tar­get price for the stock is $333, com­pared with Ar­cham­bault’s $250 six-month es­ti­mate. Some an­a­lysts from bou­tique firms have even loftier tar­gets, but among Wall Street banks, Jonas’s is high­est. Nei­ther Jonas nor Ar­cham­bault ranks among the five most ac­cu­rate fore­cast­ers of the stock, ac­cord­ing to data com­piled by Bloomberg. The top two from ma­jor banks, Colin Lan­gan of UBS and Ryan Brinkman of Jpmor­gan Chase, have tar­gets of $160 and $185, re­spec­tively.

Jonas wields mar­ket in­flu­ence. Af­ter he is­sued a re­port on Feb. 25, 2014, dou­bling his price tar­get to $320, Tesla’s stock price rose 14 per­cent. In that re­port, he wrote that the com­pany’s bat­ter­ies could change both the trans­porta­tion and power-util­ity busi­nesses. Within three days of Jonas rais­ing the tar­get, Tesla com­pleted a $2 bil­lion con­vert­ible debt of­fer­ing with Mor­gan Stan­ley and Gold­man Sachs as un­der­writ­ers.

That wasn’t the first time he dou­bled his tar­get. Tesla re­ported its first and only quar­terly profit on May 9, 2013, send­ing the stock up 38 per­cent in two days. On May 14, Jonas more than dou­bled his tar­get price, to $103 a share, and the stock rose about 10 per­cent in the next two days. Ar­cham­bault also raised his share price tar­get on May 9 to $61, from $45—though that was still be­low Tesla’s price at the time. Within eight days, Tesla sold $360 mil­lion in stock with Gold­man Sachs as un­der­writer and $600 mil­lion in con­vert­ible debt with both firms un­der­writ­ing.

“The spirit of the law was com­pro­mised,” ar­gues Doug Kass, a colum­nist for who bets against Tesla stock as pres­i­dent of hedge fund Seabreeze Part­ners Man­age­ment. Tesla shares are down about 8 per­cent this year. Mor­gan Stan­ley In­vest­ment Man­age­ment, an as­set man­age­ment arm of the bank, has been one of the sell­ers.

The bot­tom line A Gold­man an­a­lyst drew at­ten­tion for the tim­ing of an up­grade, but the op­ti­mism of a Mor­gan Stan­ley an­a­lyst is more ex­treme.

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