Last week was undoubtedly a rough ride for Elon Musk and shareholders of Tesla (TSLA, Financial). Fueled by an extremely bearish analyst note and some troubling safety news, shares of the electric car maker are approaching two-year lows.
Worst-case scenario
On a recent private call with clients, Morgan Stanley analyst Adam Jonas painted a bleak picture by setting a $10 price target for his worst-case scenario. This was significant, as Jonas has been one of Tesla’s biggest bulls for years. Not any more, it seems:
"Today, supply exceeds demand, they're burning cash, nobody cares about the Model Y, the company raised capital near lows, no strategic buy-in ... There could have been a strategic involvement in the capital raise — someone to fill the board to provide some know-how.”
We think this is significant not because analyst notes have any real insight per se, but rather because it is indicative of a greater shift in how the company is perceived on Wall Street. It seems as if the narrative of “exponential growth” has run out of steam, and now we can expect investors to start asking the tough questions. In the analyst’s own words “this is now a distressed-credit story and restructuring story.”
Safety issues
Then there was the story in Consumer Reports that found that Tesla’s new autopilot features could cause safety issues for drivers. The software, which has to first be enabled by the driver, allows the car to automatically switch lanes. The report found that the technology leaves a lot to be desired:
“In practice, we found that the new Navigate on Autopilot lane-changing feature lagged far behind a human driver’s skills. The feature cut off cars without leaving enough space, and even passed other cars in ways that violate state laws, according to several law enforcement representatives CR interviewed for this report. As a result, the driver often had to prevent the system from making poor decisions.
'The system’s role should be to help the driver, but the way this technology is deployed, it’s the other way around,' says Jake Fisher, Consumer Reports’ senior director of auto testing. 'It’s incredibly nearsighted. It doesn’t appear to react to brake lights or turn signals, it can’t anticipate what other drivers will do, and as a result, you constantly have to be one step ahead of it.'"
Given that Autopilot has been found to have been engaged in no less than three fatal crashes involving Tesla vehicles, the report should raise more questions about whether or not cars with the feature should be on the road at all. At this point, an intervention by the NHTSA would not be a surprising development, especially when one also considers the issue of spontaneously combusting Teslas in China.
Summary
Tesla bulls will be badly needing some good news, but it is not at all clear where this may come from. Now that investors are waking up to the reality of falling demand and ongoing cash burn, we can probably expect more weeks like this one.
Disclosure: The author owns no stocks mentioned.
