Morgan Stanley analyst Adam Jonas has been a long-time bull on Tesla Motors (TSLA). The New York Time called him the ‘Tesla Cheerleader‘, but today the analyst is out with a rare negative note on the automaker following the announcement that the company made an offer to buy SolarCity.

Morgan Stanley is now reducing its price target to $245 from $333 and downgrading the rating on the stock from ‘overweight’ to ‘equal weight’.

The analyst hasn’t modeled in a possible acquisition of SolarCity yet, but he says that the downgrade is mostly because of the “higher risk premium” of the proposal, as well as a few other things:

We are downgrading TSLA to EW from OW and reducing our price target to $245 from $333 previously. 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. Additionally, we have also marked-to-market our DCF and earnings model to fully reflect the impact of the capital raise and exercise of stock options by CEO Elon Musk in May. Other changes with respect to Tesla Mobility (such as an increase in discount rate to account for more ambiguity on timing) are discussed here. Given the uncertainty as to whether TSLA and SCTY shareholders will approve the proposal, we have not made changes to our operational assumptions, and have not, at this stage, modeled in an acquisition of SCTY. Our bear case of $50, which ascribes no valuation for Mobility & Energy and takes into account significant execution issues at the core remains unchanged. While there may be any number of lucid arguments supporting the strategic rationale of a combination, we believe many of the benefits could have been achieved through arm’s length/strategic partnership and without the risks inherent in exposing Tesla shareholders to the financial and capital markets risks faced by SCTY.

‘Tesla Mobility’ is a new service Jonas predicted Tesla would soon launch. He thinks that the automaker will launch a “Uber-like” service to compete in the ride-sharing/taxi market and eventually will be combined with self-driving technology through Tesla’s Autopilot program.

He said he would be “surprised” if the company didn’t explain their plan for such a service before the unveiling of the Model 3, which happened last March and we have yet to hear about it.

In the note to Margan Stanley clients, the analyst elaborated on why the firm is being cautious on the possible SolarCity-Tesla merger:

At a high level, we view Tesla’s share price as influenced by 3 main factors: (1) The quality and appeal of its cars, (2) the pace of cash consumption, and (3) the company’s ability to access capital markets to fund ambitious investment and growth objectives. Let’s examine each of these while contextualizing SCTY within our views of Tesla’s business fundamentals and share price outlook:

1. Does buying SCTY help TSLA make better cars? No. We do not believe so. In our view, the success of the Model 3 will be due to factors not related to the ownership of a solar company. Over the long term, could we envision a confluence of clean transportation and clean energy where Tesla offers services and the use of its ecosystem to consumers as a bundle? Sure. Could Tesla achieve even higher economies of scale in storage from serving the energy market that could enhance the economics of batteries for cars? Possibly. We believe such benefits are theoretical and very long term.

2. Does buying SCTY improve the pace of TSLA’s cash burn? No. Based on our electric utility/clean energy team’s forecasts, it appears SCTY would exacerbate the cash burn of TSLA even when allowing for cost synergies and initial commercial opportunities. On our current forecasts without an acquisition, Tesla already consumes significant amounts of cash on an annual basis. Following nearly $2bn of free cash burn in 2015, we forecast FY16 cash burn of $1.8bn followed by $400mm in 2017. We don’t forecast Tesla to achieve positive free cash flow before the middle of 2018. Our N.A. Power Utility and Clean Tech team estimate SCTY cash burn of $364mm in 2017 and $116mm in 2018. Exhibit 5

3. Does buying SCTY improve Tesla’s access to the capital markets to help fund the mission? No. We think it raises a number of questions around governance that may test the bond of trust with investors who, to this point, have funded Tesla’s early accomplishments. Even if Tesla shareholders do not approve of the deal, the questions surrounding governance could have a lasting impact on the investment debate. In the event that a deal is rejected, would SCTY face increased difficulty in accessing capital from other sources? What impact would this have on investor perceptions of Tesla? On yesterday’s analyst conference call Elon Musk stated: “If SolarCity is constrained in the short term from going out and raising equity, Tesla would provide a bridge loan if needed. I don’t think it is going to be needed.” What are the precedents for an acquiror lending money to an acquiree, particularly with conflicts of interest related to family and cross ownership? Would such a bridge-loan require shareholder approval?

Assuming SCTY turns out to be a success, is it big enough to move the needle significantly? Discussions with our N.A. Power Utility & Clean Tech team have led us to agree with CEO Elon Musk on some of the potential benefits that could be derived from a combination of TSLA/SCTY. Among those, we’d highlight (1) Lower sales costs for solar/storage; (2) Lower installation costs; and (3) Advantages from integrating solar and storage especially as net metering rules change at the state level. However, these potential benefits appear to be relatively small over the next few years even under rosy scenarios. Exhibit 4 From our perspective, we believe Tesla’s valuation is dominated by the significant opportunities it faces in the areas of shared, electric and autonomous mobility. Our core thesis for the long term direction of the automotive industry lends itself to many of the skills and attributes that Tesla possesses. We forecast Tesla’s revenues to exceed $9bn in 2017 vs. SolarCity revenues of a bit more than $600m this year.

Adam Jonas is ranked #251 out of 3,980 analysts on TipRanks with a success rate of 49% and an average return of 11.9%.

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