Bloomberg Businessweek (North America)
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”
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 Thestreet.com 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.