This morning, JPMorgan Chase issued a note to clients, reducing their price target for Tesla shares from $308 a share to $195 a share. And Tesla shares are down significantly on the news. This is the clearest indication yet of a shift in sentiment on Tesla, that investors should see as a broader risk-off marker more generally.
Dilution
The way I am seeing this price target downgrade for Tesla is as a warning about potential dilution for Tesla shareholders rather than a warning of default or anything more drastic. Tesla has a lot of prominent backers who would ostensibly give the company a lifeline if it ran into funding issues. But that lifeline will come at a price.
And given the erratic behavior of Tesla CEO Elon Musk, more investors now doubt Tesla’s ability to execute on its promise to reduce its cash flow burn. So think Uber, rather than Amazon, when it comes to likely outcomes. And that means dilution.
Risk-off signal
What I have been saying since early March is that we are seeing a regime shift at the Fed. And while it isn’t clear to me we how exactly that shift will play out, what is clear is that it means the Fed has more of a tightening bias. And that means it is more likely to tighten in the face of uncertainty about macro signals from the economy.
The first group of risk assets to feel the impact was the emerging markets space. Look at what Fed chair Powell said in May. That was a clear risk-off marker for EM. And we have seen two nations – Argentina and Turkey – get battered in the aftermath of those remarks.
But the Fed’s tightening bias has risk-off implications for other risk assets as well. Boston Fed President Eric Rosengren told us this back in March when he said:
recent volatility in stock and bond markets likely reflects, in part, the realization that financial markets need to factor in the risk that wages and prices could grow too quickly in the event of too much fiscal and monetary stimulus, “particularly with the economy currently at or beyond full employment, and inflation approaching the Fed’s goal.”
That’s Fedspeak for “don’t assume there is a Fed put unless markets really get hammered. We’re going to err on the side of tightening unless and until the macro signals definitively tell us to halt or there’s an accident.”
Tesla as a marker
So, when I see Tesla getting its price target cut aggressively, I take notice. Tesla is the quintessential field of dreams company of this bull market. When analysts turn against Tesla, you know it’s time for other field of dreams companies to also put up or shut up.
Let me remind you of how I positioned it two months ago when I hypothesized “why shares in companies like Tesla are going to zero“:
I am using Tesla as an example here more than anything… I do want to highlight the ‘bubble’ that Tesla represents and what it means regarding excess consumption and investment…
When the bubble pops, people lose their jobs. They stop spending money and their companies stop spending money. To the degree these companies are leveraged up as Tesla is, you have a debt that goes bad too.
So, the question has to be: how sustainable is all of this? $1 billion scooter companies are a symptom of a much wider problem of capital misallocation…
Right now, we’re in the midst of the great unwind. That’s my view here. Investors still have patience for field of dreams companies like Tesla, but scepticism is palpable…
And there are two ways this can go. Either Tesla steps up to the plate and delivers or it fails, and the company goes under.
And when that happens, it will be occurring simultaneously at hundreds of other field of dream technology companies spending IPO and VC money like crazy. Most of those companies will go bust. And that’s going to leave a huge hole in the economy.
This day is fast approaching.
Caveat Emptor