It is important to understand the relationship between a CEO and the powerful Wall Street analyst who covers their stock. Usually this is reserved for the Goldman Sachs Group Inc. (GS) , Morgan Stanley (MS) , Deutsch Bank (DB) or JP Morgan & Chase (JPM) lead analyst - it's easy to tell who the lead analyst is in the space, because they do all of the lucrative investment banking business related to the company in order to get a favorable nod. But for the analyst, the benefit is the insight that no one else gets. The analyst has the ear of the CEO, and vice versa – and they always take each other’s calls.
Today, the lead analyst at Morgan Stanley released a report upping the Tesla (TSLA) price target 90% to $465. Keep in mind the stock is trading at $251 in morning trading, so one might ask: Why in the hell would you make a bold step like that? The answer is, “Because the CEO probably sat down with you over the weekend at his estate and laid out how the future will unfold” – and when you are sitting with Elon Musk, who can channel Steve Jobs, Henry Ford or Thomas Edison, you listen.
Breaking Down The +100% Tesla Upgrade at Morgan Stanley
Make no mistake: Tesla just revealed that it was performing a capital raise, and understand that Morgan Stanley will make boat loads of money from this shelf offering – and Musk will spend $26 million of his own cash to buy this TSLA private offering. It was little surprise that this $750M raise will wind up being a fantastic investment for FOE (Friends of Elon). I can tell you, I would kill to do some wing walking with Elon. I’m sure I could find a great small cap stock to write about based on his thinking and insight.
But for the record - it is difficult to convince investors to buy shares at the current $33B valuation in Tesla – unless of course, you reveal what this visionary’s long term thinking is for cars of the future. After reading the report, I totally agree – Tesla is going to $500 per share in the next few years, because they are positioning themselves to compete with Uber.
Research on Wall Street will take a turn in the future, because the 100 year old model where Investment Banking pays research as a loss leader will end. Thus far, we’ve lived in a climate where the investment banking firm (Goldman or Morgan) has to have the top analyst, volume in market making, and a long term relationship with management of the company they were covering. Analysts would rarely waiver from speaking positively about the company they’re in a long-term relationship with. Yet, that’s your grandfather’s Wall Street model. Now, it has to do with the insight of the analyst, and his ability to articulate the future of industry via exposure to the CEO.
For Tesla, Musk explained that they would make fewer cars, but they would make so much more money on services that the manufacturing margins wouldn't be a factor in valuation. Perhaps more importantly, he predicts that we will be ordering a driverless car to our homes, and most likely we would not even own a vehicle.
This requires insight and writing ability on the part of the Morgan Stanley analyst attempting to articulate this vision. That’s the reason why Musk chose Morgan Stanley. This had little to do with spreadsheets. This is your new age research analyst: the odd duck who is willing to wing walk with the CEO and founder – meaning the days of plugging numbers into a quant model are long since over, and now getting smaller in the rear view mirror.
Steve Kanaval is the author of the upcoming Equities.com's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner. Sign-up here for a free issue today!