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Morgan Stanley explains how Tesla could become a $10 stock

Tesla’s (TSLA) stock has dropped about 38% this year amid lower-than-expected vehicle deliveries, cash burn concerns and a crash reportedly related to the company’s autopilot feature.

But this could just be the start of the stock’s declines, according to one analyst.

Morgan Stanley analyst Adam Jonas cut his bear case outlook scenario on Tesla’s stock from $97 to $10 in a note published Tuesday. This worst-case scenario would represent an about 95% decline from Monday’s closing price of $205.36 per share.

By Jonas’ reckoning, Tesla’s stock price is driven by demand for its products, cash flow generation and access to capital markets – and none of these factors has been particularly strong as of late.

“This year’s sharp deceleration in demand has led to a substantial curtailment of the company’s ability to self-fund through free cash flow generation, at the margin potentially impacting the firm’s access to capital,” Jonas said.

“Tesla’s recent $2.7 billion equity and convertible debt raise may provide an extra year of liquidity to run a business of this size and cash consumption,” he added. “However, Tesla may now find itself in a cycle where a lower share price may itself contribute to a potential deceleration of employee morale as well as potentially increased counterparty risk with both customers and business partners ... potentially further impacting fundamentals.”

Tesla may have over-saturated the retail market for battery electric vehicles outside of China, Jonas added, and would need to aggressively expand into the Chinese domestic market, lower-priced SUVs and logistics and mobility fleets in order to generate new demand, Jonas said.

Jonas’ base case price target for Tesla is $230 per share. He rates the stock as Equal-weight.

‘Perfect storm’

Jonas isn’t the only analyst who has recently become less optimistic about Tesla’s stock. WedBush analyst Dan Ives cut his price target to $230 from $275 per share on Monday, citing “continued concerns around Tesla’s ability to balance this ‘perfect storm’ of softer demand and profitability concerns which will weigh on shares until Musk & co, prove otherwise in terms of delivering solid results over the coming quarters.”

Tesla CEO Elon Musk speaks before unveiling the Model Y at the company's design studio Thursday, March 14, 2019, in Hawthorne, Calif. (AP Photo/Jae C. Hong)

On Monday, Tesla’s stock fell to its lowest intraday level in nearly three years, extending declines after CEO Elon Musk wrote in an email to staff last week that a “hardcore” review of the electric car company’s expenses to avoid running out of cash in then next 10 months.

Tesla reported in April that it lost $702 million on an adjusted basis in the first three months of the year, and its total cash and cash equivalents declined by $1.5 billion from the end of 2018 to $2.2 billion. The company in early May announced it was raising more than $2 billion in a debt and stock offering to strengthen its balance sheet and for other corporate projects.

Tesla’s stock had 11 Buy rating equivalents, 10 Holds and 15 Sells as of Tuesday morning, according to Bloomberg data.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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