LONDON — Dunelm, Halfords, and Pets At Home are the UK retailers most at risk of having their business models disrupted by digital, according to Morgan Stanley.

Analysts Geoff Ruddell and Amy Curry warned in a note sent to clients this week that "all rely on gross margins that are unsustainable in the age of online retailing and discounters."

Morgan Stanley believes that all three have business models that were "build for a different age."

Dunelm, Halfords, and Pets At Home all rely on big, retail park shops that people visit not-very-often to pick up big ticket items: Dunelm sells furniture and soft furnishing, Halfords is a bike and car parts retailer, and Pets At Home sells, as you'd expect, pretty much everything you'd ever need for your pet.

Because these shops are once-in-a-blue-moon visits for people rather than part of a regular shop, the companies have high profit margins on all their products. This means there's enough profit baked in to a sale to cover the shop's running costs when it's quiet.

"Retail gross margins were 50%, 51%, and 57% last year at Dunelm, Halfords and Pets at Home, respectively," Ruddell and Curry write.

But these retailers are facing pincer-like competition from two camps: discount retailers like B&M and The Range that take the "pile 'em high, sell 'em cheap" approach, offering only the best-selling products in each category rather than an expensive variety; and online-only sales, both from Amazon and more specialised digital retailers such as online pet shop Zooplus and cycle retailer Wiggle.

These digital and discount challengers have none of the fat pricing that Dunelm, Pets At Home, and Halfords rely on to keep them going, making these three look expensive by comparison. Morgan Stanley says: "We show that consumers can now buy many of the items they sell c.20% more cheaply at discounters or online."

"Whilst these kinds of price gaps may not be new, consumers' willingness to shop in these channels appears to be increasing rapidly and we think this is becoming more and more evident in the financial performance of these 'legacy' retailers," Ruddell and Curry say. Earnings

Earnings forecasts for all three have been repeatedly cut and share prices have suffered. Despite the recent poor performance, Morgan Stanley says it still sees "considerable further downside."

The two analysts warn that "there is little that management will be able to do," saying: "The companies' best hope, we think, is focussing on 'adding value' in-store (for example by providing advice or fitting services) in order to justify premium pricing - something that all three are increasingly looking to do."

To make matters worse for Halfords, the retailer has just lost its CEO Jill McDonald. McDonald has been orchestrating a multi-year turnaround plan at the retailer but was the surprise pick to head up Marks & Spencer's crucial clothing division.

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Shares of Tesla on Monday slid 3%, to $314, after Morgan Stanley's lead auto analyst, Adam Jonas — a reliable Tesla bull — downgraded the stock from "overweight" to "equal weight."

He retained his target price of $305.

Jonas said he thought Tesla would struggle to deliver its Model 3 mass-market vehicle in 2017. The car is scheduled to launch in July, with a production ramp-up after.

Tesla expects to produce 5,000 Model 3s a week by the end of 2017, with that pace increasing to 10,000 at some point in 2018.

Jonas said he thought Tesla would deliver only 2,000 vehicles in 2017 and sell 90,000 in 2018 — figures the analyst considers to be below investor expectations.

The $35,000 Model 3 is a critically important car for Tesla as it transitions from selling all-electric luxury vehicles and pushes toward 1 million annual deliveries by 2020.

Jonas says Tesla is on the verge of facing competition from Silicon Valley tech companies that are casting their eyes on the potentially lucrative transportation industry.

"We are intrigued by how many investors we speak with view Tesla's biggest competitive risk as coming from the existing auto industry," he wrote. "We do not see it that way. We believe Tesla's most important competition will ultimately come from the world's largest, best-capitalized tech firms. Many of these firms (such as Alphabet, Apple, and others) are already testing fully autonomous vehicle fleets on public roads."

He added:

"While shared autonomy may not be a winner-take-all game, we have an increasingly difficult time imagining Tesla as the dominant player and as a stand-alone company longer term. We wonder if the firm is better off finding a partner that can help fund the necessary up-front investment while extracting greater value from the data produced by its machine-learning ecosystem.

"These may seem like issues that may take a long time to answer. But we wouldn't be surprised if some of the early clues are on display within the next year or so."

Jonas' views are consistent with his rather far-reaching thesis that the old business model of building and selling cars — which remain idle most of the time for their owners — will be replaced by a miles-driven model that favors shared mobility, autonomous cars, and software.

Beyond his rating downgrade, Jonas also said he thought Tesla would burn more cash in 2017 than expected — over $3 billion, versus $2 billion to $2.5 billion — and that the Chinese market wouldn't provide Tesla with immediate opportunities for global expansion, contrary to what some investors expect.

SEE ALSO: Elon Musk has discovered a new passion in life — and it could be Tesla's best product yet

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A big deal in biotech is going to line the pockets of some of Wall Street's biggest firms. 

The biotech company Thermo Fisher Scientific has agreed to buy the drug-ingredients maker Patheon in a $7.2 billion deal.

In a statement Monday, Thermo Fisher said it would acquire all outstanding Patheon shares for $35 apiece in cash, 35% higher than where the stock closed Friday.

One of Patheon's biggest backers, JLL Partners, a Chicago-based private equity firm, stands to make a killing from the deal. According to reporting by Bloomberg, affiliates of JLL could earn $2.2 billion, or nearly five times the original $462 million they invested in March 2014 prior to the company's initial public offering in July. 

Two of Wall Street's fiercest rivals also stand to profit from the acquisition. 

On the buy-side of the deal, Goldman Sachs advised Thermo Fisher and could rake in $30 million, according to data from Freeman & Co. 

On the sell-side, Morgan Stanley served as Patheon's adviser and could make $35 million.

The deal is expected to close by the end of 2017.

SEE ALSO: A 150-year old Canadian bank is muscling in on Wall Street

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Don't let Berkshire Hathaway's IBM stock selloff scare you, Morgan Stanley says.

The multinational technology company's stock price is primed for a strong second half of the year, according to the US investment bank.

IBM posted weak first quarter gross margins, but Morgan Stanley expects a rebound with IBM due to ship a new mainframe later this year.

According to Morgan Stanley's analysis, the launch of a new mainframe has historically added $400 million in pre-tax income. 

"We see precedent for IBM achieving a back end loaded year," the Morgan Stanley analysts noted, also adding that in the second half, "growth accelerates and margins expand around a mainframe cycle making the recent pullback an attractive entry point heading into 2H17, in our view."

The bank has a price target on IBM of $212, almost 40% above IBM's current $153.47 stock price.

IBM's stock has dropped in recent weeks, down from a high of $182.78. One of the main contributors to that pullback was Berkshire Hathaway's decision to sell 20.5% of its IBM stock.

"While it’s never good to see a long-term, large shareholder reduce its position, the reasons for owning IBM drifted materially in recent years which likely drove the decision to reduce the position when the share price approached the fund's cost basis," the note said. 

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Don't let Berkshire Hathaway's IBM stock selloff scare you, Morgan Stanley says.

The multinational technology company's stock price is primed for a strong second half of the year, according to the US investment bank.

IBM posted weak first quarter gross margins, but Morgan Stanley expects a rebound with IBM due to ship a new mainframe later this year.

According to Morgan Stanley's analysis, the launch of a new mainframe has historically added $400 million in pre-tax income. 

"We see precedent for IBM achieving a back end loaded year," the Morgan Stanley analysts noted, also adding that in the second half, "growth accelerates and margins expand around a mainframe cycle making the recent pullback an attractive entry point heading into 2H17, in our view."

The bank has a price target on IBM of $212, almost 40% above IBM's current $153.47 stock price.

IBM's stock has dropped in recent weeks, down from a high of $182.78. One of the main contributors to that pullback was Berkshire Hathaway's decision to sell 20.5% of its IBM stock.

"While it’s never good to see a long-term, large shareholder reduce its position, the reasons for owning IBM drifted materially in recent years which likely drove the decision to reduce the position when the share price approached the fund's cost basis," the note said. 

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Nothing quite shows the grip US politics has on financial markets right now than the two charts below.

Courtesy of Hans Redeker and Gek Teng Khoo, FX strategists at Morgan Stanley, it shows the relationship to Donald Trump’s net approval rating among American voters, overlaid with movements in the US dollar index and US inflation expectations over the past year.

Here they are:

Pretty amazing, right?

Where Trump’s opinion rating moves, the buck and inflation expectations tend to follow.

The pair think there’s a simple explanation to explain the relationship.

"Recent swings in USD find some explanation in changes in President Trump’s domestic support," they wrote in a note released earlier this week.

"When his popularity was on the rise, USD moved higher.

"Conversely, when his approval rating declined, it took USD with it."

Redeker and Khoo suggest that investors are taking the view that declining support for Trump may reduce the US reform momentum and with that the US growth outlook.

Based on the evidence in the charts above, it certainly appears like that’s the case.

Perhaps it’s time for traders to pay closer attention to opinion polls in the period ahead in order to determine where the US dollar, along with bonds and rate-sensitive stocks, are likely to head next.

SEE ALSO: There's one big reason the stock market is becoming Trump-proof

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“Just keep your head down and do a good job, and that will speak for itself.”

How often have you heard that before? If this was ever true, it certainly isn’t enough in today’s workplace, says Keishi Hotsuki, Morgan Stanley’s Chief Risk Officer. Business communication skills are essential.

“When you first start a career in a quantitative job like risk management, you need to show how good your hard skills are and that you can deliver your assignments well. But eventually you’ll need to transition from being a good player to a good leader.”

In his 30-year long career, Hotsuki has found that the bigger the role, the more sophisticated the communication skills need to be. “My first year as Chief Risk Officer was an enlightening experience,” he says, “because the biggest challenge of the job turned out to be communication. And as you become more senior, you realize that everything comes down to the soft skills.”

Hotsuki has developed a shortlist of five essential communications skills over the years, some of which he’s culled from experts—the rest from experience. He refers to them frequently to keep his skills sharp, and shares them with his mentees:

Learn to listen

“Normally, people think that communication is all about talking. In fact, the most effective communication begins with listening,” says Hotsuki. “Rather than starting with my own agenda, I try to start with the goal of the meeting and ask questions, then listen. The benefits are twofold: First, you can understand where the other party is coming from; second, people feel better when they know they’ve been heard.” With that as a foundation, the chances for constructive engagement improve significantly.

Know your audience

“When giving presentations, we tend to assume that our audience knows our subject and is as enthusiastic as we are. That’s often not the case,” says Hotsuki. “If your manager invites you to a meeting with senior stakeholders, you should ask why you’re invited, what the purpose of the meeting is, who the key players are, and how you can contribute. Knowing the audience is the first step to figuring out how you’re going build your relationship with them.”

Think of presentations as three-course meals. Start with the high-level “appetizer:” Here is the issue; my recommendation and rationale. Pause to make sure your audience is engaged and ready for the next serving. Then bring out the “main course” of critical content in your presentation. “Dessert” is the detailed deep-dive. “You should only serve this part if they’re still hungry,” Hotsuki says.

Practice how to seize the opportunity

“Even the most professional public speakers will practice before they go on stage,” he says. Ahead of high-stakes meetings, practice your delivery: Set the goal of the meeting; summarize the key points; anticipate questions and prepare your answers. “When the senior person in the room asks, ‘Why are we having this meeting?’ you have 20 seconds, not five minutes, to explain. If you're not prepared to seize the opportunity, Hotsuki warns, “you might not get the outcome you hoped for."

These days, it’s not a stretch to argue that the best Android phones are out-designing the iPhone. Devices like Samsung’s Galaxy S8 have features that just aren’t available on Apple’s flagships, for example.

When it comes to the metrics that matter most, though, Apple is in front. Not only does it take the lion’s share of the smartphone industry’s profits, iPhone owners remain far more loyal than any Android counterpart.

According to a recent Morgan Stanley survey charted for us by Statista, 92% of iPhone owners who plan to get a new phone in the next 12 months say they’re “somewhat or extremely likely” to stick with Apple. That’s up from last year, when that number was 86%. Samsung comes in second with a 77% retention rate, which is easily the highest for an Android brand, but still a ways behind. The likes of LG, Motorola, and Nokia are closer to 50/50, if not lower.

There are many ways to explain this: The Android market is defined by competition, while iOS is Apple’s alone; Apple has done very well to fashion itself as an aspirational lifestyle brand; iPhones themselves are just great devices; transitioning away from iMessage is an absolute nightmare, and so on. Whatever the case, Apple can feel confident that its grip on the high-end phone market isn’t slipping anytime soon.

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Waymo, Google's self-driving car project, recently announced a partnership with the ridesharing company Lyft, which could be its first step towards becoming a major contributor to Google's overall value.

If Waymo vehicles can account for roughly 1% of miles driven globally by 2030, Morgan Stanley equity analysts Brian Nowak and Adam Jonas believe it could be worth $70 billion, potentially more. That would add roughly 12% to Google's current enterprise value.

"We are encouraged by Waymo's new partnership with Lyft as it gives Waymo access to more miles driven – which," write Nowak and Jonas, "is important to building/optimizing the autonomous business and data set."

Waymo is also Google's most likely spin out from its "other bets," a group of investments the web company has made in different industries such as home automation and mobile hardware, according to Nowak and Jonas. Waymo —formerly called Google X — has already rebranded and carries significant room for growth, making it an enticing spin out candidate.

Additionally, Google may not want to bear the burden of legal action against the company stemming from accidents involving Waymo's vehicles.

"Even assuming Waymo’s cars are involved in 90% fewer crashes than the average human driven car would still involve 5 per year (roughly 1 every 10 weeks)," write Nowak and Jones. "One could argue that even in the event Waymo’s cars are an order of magnitude safer than today’s human driven cars GOOGL may not want to test the US court system for the precedent."

But if Waymo can find a way to improve on the Morgan Stanley's modeled revenue of $1.25 per mile and 1% of global miles driven, Nowak and Jonas see a scenario in which the company's value could increase to roughly $140 billion.

SEE ALSO: Waymo started a war with Uber, and it could be Uber's downfall

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A team of analysts from Morgan Stanley on Thursday published an updated list of the bank's "Shared Autonomous 30"— a group of companies that the team thinks will influence a big transition from a world in which vehicles are sold to a world in which more emphasis is placed in how much vehicles are driven.

"The 100-year-old auto industry business model is facing unprecedented technological disruption, starting with the very definition of the market itself — moving from 'millions of units sold' annually to 'trillions of miles traveled' annually by the global car parc," the analysts wrote.

"Shared, autonomous and electric mobility," they added "addresses many of the shortcomings of the current industry model, including low utilization (cars are used 4% of the day with an available seat mile utilization of barely 1%), consumption of finite resources (cars consume nearly 400 billion gallons of fuel per year, accounting for 45% of US oil demand), and public safety (roughly 3,500 traffic fatalities per day globally)."

But here's where things get truly alarming for the traditional automakers.

"Morgan Stanley's US Research team settled on 30 US stocks," the note read, "all rated either Overweight or Equal-weight, across 14 industries, that the analysts believe are favorably exposed to growth opportunities in the execution of a shared, autonomous, electric ecosystem, or are favorably positioned to the adjacent data and content opportunities that are enabled by a business model that liberates hundreds of billions of consumer hours for monetization."

The worst-case and the best-case scenarios

At worst, this is hilariously wrong: the traditional auto industry will report May US sales next week, and the pace is expected to be running close to 17 million for the full year. That would mean more than 51 million new cars and trucks have rolled off dealer lots in three years — almost none of them shared, autonomous, or electric.

At best — at least as far as Morgan Stanley's teams' ability to call winners and losers — the list is grim for conventional carmakers. Only Tesla features among the 30. The remainder of the lineup includes tech firms such as Microsoft, Google, and Facebook; the auto contract manufacturer Magna; the mega-dealer AutoNation; and even Buffalo Wild Wings. ("Over the course of a year, how many more drinks might be consumed if people were completely freed from the responsibility of driving?" the team asked, evidently in all seriousness.)

It's worth noting that what we're looking at here is nothing less than the predicted collapse of an industry that defines an entire US city — Detroit — and that employs hundreds of thousands of people in the Midwest and South. Car dealers make a substantial contribution to the localities where they do business, and auto lending and leasing is the second-biggest business of many banks, behind mortgages.

The gains from the auto industry, in the US, as actually quite evenly distributed; the car business is the polar opposite of monopolistic, with General Motors, Ford, Fiat Chrysler Automobiles, and Toyota — the four biggest companies by share — each controlling less than 20% of the market.

It actually does make sense that numerous auto-industry-adjacent players will play a role in a shared, autonomous economy. But it's perturbing that only Tesla seems to have any meaningful upside. The assumption seems to be that Tesla will somehow dominate with electric, shared, and autonomous mobility all at once. 

However, Tesla isn't that much different from a traditional carmaker, because it's essentially in the business of building a rolling mobility platform that costs quite a lot. And at this juncture, Tesla has shown itself to be very, very good at charting a visionary future, but very, very bad at actually constructing and delivering the vehicles that will make the visionary future a reality (less than 80,000 in 2016, with not much improvement in 2017, while GM will sell almost three times that many in just May).

To its credit, the Morgan Stanley team wrote that a lot of hard-to-predict stuff could happen between now and the end of the 100-year-old car business. But just as a prediction, it should be completely terrifying to auto executives across the world.

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Ford ousted Mark Fields as CEO this week and replaced him with Jim Hackett, an executive with a futuristic outlook who will most likely be tasked with talking up Ford's efforts to transform itself into a Tesla-beating mobility company.

The development, which surprised much of the auto industry, has been chalked up to Ford lagging companies such as Tesla and Uber when it comes to the future of transportation.

But that analysis is wrong, even if it supports the story that Ford wants to tell. Fields was fired for a stock price that fell 40% during his tenure.

Rationally, Ford is a much less risky investment than Tesla, and although Tesla's upside could be massive, its downside could also be huge. The price of the risk is represented by Tesla's stock price and market cap, which has surged 50% so far this year, passing Ford's.

Ford isn't without a compelling upside of its own. The stock fell to $11 from $17 under Fields, at a time when Ford was racking up record profits and paying a 5.5% dividend.

But the action is with Tesla. Curious about this mismatch, Morgan Stanley's team of auto analysts, led by Adam Jonas, surveyed investors on their views about both companies. In a note published Friday, the results were summarized — the investors appear to be less bullish on Tesla than the stock price would indicate and less bearish on Ford.

Surprisingly bullish on Ford

Morgan Stanley sifted through 140 responses and was "surprised to see how positive investors appear to be on Ford vis-à-vis Tesla in terms of forward-looking share-price performance," Jonas wrote.

Investors were, in fact, very positive.

"When forcing investors to make a choice between just Ford and Tesla, we were surprised to see Ford receive 57% of the vote," Jonas wrote. "What's less clear is if investors are expressing an attraction to Ford's deep value and room for the shares to mean revert, or an aversion to Tesla's very strong run, lack of free cash flow generation, or other risks."

The analysts also zeroed on a not-much-discussed vulnerability that Tesla faces: making money on the forthcoming Model 3 vehicle, which is expected to launch in July and make up the bulk of Tesla's sales going forward.

"The majority of investors we surveyed believe Ford's stock will outperform Tesla, in spite of the very large majority of investors expecting the Model 3 to be successful," they said. "Perhaps the missing link is that the Model 3 may be a commercial success (i.e., a very nice car) but not necessary a financial success (i.e., a profitable car). Time will tell."

Nightmare scenario

This last point is a nightmare scenario of sorts for Tesla. The Model 3 could become the car that eats the company. With current distribution, there have been some indications that annual sales of the Model S and Model X luxury vehicles could plateau at about 100,000.

Even if the figure were double that, Tesla would still need to sell 800,000 Model 3s and mass-market variants, such as the Model Y crossover and possibly a compact pickup truck. Production at that level would mean Tesla would need to build a new factory or set up assembly lines at its Nevada Gigafactory. The capital expenditure to pull this off would be staggering for a company that isn't making money.

Ford, by contrast, has made over $20 billion in the past two years.

It's too late for Tesla to back out of the Model 3 and revert to being a potentially very profitable niche carmaker. Investors may finally be casting aside Tesla's remarkable story and taking a hard look at the business, which is facing remarkable challenges.

SEE ALSO: Ford is no longer just a car company

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Morgan Stanley's "Global Autos & Shared Mobility" team of analysts published a research note on Tuesday highlighting numerous aspects of its overall thesis on the transformation of transportation.

They covered a lot of ground, but let's focus on what's actually its most radical prediction. 

According to lead analyst Adam Jonas and his team, Morgan Stanley is "bullish on EV penetration and universally cautious on the long-term viability of the 100-year-old internal combustion engine (ICE) ecosystem, which we believe is in its last generation," adding that "[w]e expect EVs to account for 50-60% of global light vehicle sales by 2040."

To put that prediction in context, global EV sales now account for about 1% of sales.

A key enabler is autonomous and shared mobility, as well as the arrival of an entirely new business model that stressed miles driven over units sold (basically, we go from a car or two in every driveway, used almost none of the time, to a massive fleet of self-driving electric taxis, driven almost all of the time). 

This puts the entire traditional auto industry at a massive disadvantage and presumably favors the fortunes of new players, especially tech-industry titans. (The analysts go so far as to declare that Apple is developing a car, and that the vehicle won't be powered by gas.)

Good for gas

Believe it or not, this scenario isn't a catastrophe for the oil and gas-refining business. According to Morgan Stanley, "Gas demand grows until early 2030s as miles traveled accelerates faster than EV penetration," and "[b]y 2040, gas relevance is extended and demand remains little changed from today's levels."

Nevertheless, the overarching thesis is that individual auto ownership is ending, along with the dominance of the gas-powered engine.

Here's a reality check on all that. True, ride-hailing services such as Uber and Lyft have in a short period created a new storyline connected to Silicon Valley. The sharing economy, through services such as Airbnb, suggest that people are aware that idle vehicles are an greatly underutilized asset. 

But it's far from clear that this story embodies a wholesale shift in consumer behavior. People continue to own stuff. And people continue to not use everything they own in the most economically advantageous manner.

Even more telling is the non-growth of the EV market, at the same time the internal-combustion market has boomed. Almost 34 million vehicles have been sold over the past two years in the US alone — and nearly all them run on gas.

Electric cars, meanwhile, have failed to launch. Tesla sales are a drop in the bucket, and it's the most successful electric carmaker around. Numerous EVs have been on sale for close to a decade now, supported by state and federal government incentives, and the results have been disappointing. 

That basic fact is largely what's propelling the "shared" versus "owned" debate. Consumers have had abundant opportunity to own EVs, but they've chosen not to. So for EVs to flourish, they need to not be individually owned. They need to be either shared or concentrated in large fleets, where they can overcome some of their charging issues (even a Tesla vehicle requires almost an hour to fully recharge at the fastest level, whereas any gas-powered car can be refueled in under five minutes).

Cue the major narrative shift: it won't be electric cars on their own that displace gas cars, or we'd already see more significant signs of that; rather, it will be networked EVs that do the displacing. 

Punctuated equilibrium

The advance of EVs, jerky and halting, is a good example in the industrial world of what the paleontologists Niles Eldredge and Stephen Jay Gould called "punctuated equilibrium." What has happened is that EVs have gone through stages of rapid "evolution," followed by static periods. 

The most recent boost took place from about 2007-2011, when Tesla began to gain traction and a bunch of EV startups emerged. Many traditional automakers also began developing all-electric cars at this time, as well. 

The startups died off, for the most part, and the traditional carmakers have seen limited demand. Tesla has more or less thrived, but it's also been selling high-priced luxury vehicles.

This has led to the uncomfortable realization that Tesla could survive, and that the traditional automakers can continue to tinker with their own EV designs, but the market won't be transformed. In fact, it could require a few more EV cycles before Morgan Stanley's outlook comes to pass — meaning that 50%-plus EV penetration won't arrive until well past the midpoint of the century. 

What's important to keep in mind here is that gasoline is easy. Once the oil is refined, it's easy to store, easy to transport, and easy to distribute. Fueling infrastructure is widespread, while electric-charging infrastructure isn't. A full tank of gas, for a hybrid gas-electric vehicle, costs about $20 and can be obtained almost everywhere, very quickly, providing another 400 miles of range. 

EVs are much better then they used to be, but they aren't even close to that.

Tesla's soon-to-launch Model 3 will be a test of Morgan Stanley's thesis; there are around 400,000 pre-orders, and if everyone buys a car, that small fleet will provide ample insight into whether EVs are really a compelling alternative to gas cars.

I don't think the Model 3 will move the needle as much as expected. Ultimately, what the pre-orders prove is that there's a lot of people who want to buy into the Tesla brand but can't, given the $100,000 average sticker price of the existing lineup.

The traditional auto industry has decided that it isn't worth it to sell those folks an EV, because all they really want is a Tesla. And the auto industry is betting that Tesla demand isn't infinite. 

If that bet pays off, then it will be a long, long time before the gas engine is wiped out.

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In a research note published Wednesday, Morgan Stanley analyst Adam Jonas asked an important question with an elusive answer: "Is Tesla even trying to be a car company?"

The question arrives as Tesla is minting new all-time highs for its shares — $335 versus Jonas' target price of $305 — but still failing to make a profit after 13 years in business.

Over the past year and a half, investors have collectively started to doubt whether or not Tesla can make good on its promise of maintaining its $50-billion-plus market cap as a carmaker alone. Conveniently, during this same period, Tesla has been busy morphing itself from being a profitless auto company to being a profitless energy-storage/solar-roof/networked-mobility company.

The overarching investment thesis now, if you're long Tesla, is that the company represents less of a focused disruption and more of an aggregate one. Here's Jonas again:

We have long viewed Tesla’s stock as a call option on disrupting a $10 trillion global market for mobility rather than an equity exposed to a $1.5 trillion traditional light vehicle market. We believe the market is increasingly coming around to the idea of giving Tesla a low chance of success in a far larger addressable market (transport network, data, time) rather than a high chance of success in a smaller addressable market (cars/machines).

You have to credit Jonas with taking a deeply futuristic view, which is nothing new for the analyst. But you also have to deal with the fact that he, like many other Tesla bulls, is knee-deep in a narrative shift. 

Long before Tesla's recent share-price surge, the company endured a period of wild volatility as Wall Street deduced, en masse, that it was dealing primarily with a carmaker stock, not a tech company stock.

On those terms, Tesla has been a weak performer, barely able to build and sell 80,000 vehicles per year while burning through cash at a ferocious rate to attack the low-margin, mass-market car business. Tesla's disruptive identity was also trapped in 2010, reliant on the fading saga of the electric car. Uber and Lyft had created a new idea — shared mobility, electric or not — and Google was pushing forward on driverless cars. 

The big shift

The upshot is that Tesla began to shift its story — CEO Elon Musk turned considerable attention to Autopilot, the company's semi-self-driving technology — and the financial community joyfully joined in. It knew what Tesla-as-car-company portended: moderate profit margins in a tough business, selling expensive electric cars to a relatively small market. 

That's not a $50-billion company — or even a $20 billion-$30 billion company, which was where Tesla's market cap hovered when this realization took hold.

The ongoing denial of Tesla's core business — not to mention Jonas' notion that Tesla is on the verge of creating a very valuable new business, "Tesla Mobility" or the "Tesla Network"— is obviously necessary to keep the surge of enthusiasm about the company going. And to be fair, while Jonas is a Tesla bull, he isn't an unqualified bull. He's never thought the car business would add up to the company's valuation over the past three years.

But the core business is the core business and it's really all Tesla has to pay the bills. After all, Tesla has rarely made money and has been forced to issue convertible debt and hit up the capital markets for additional funding. The company has even had to sell off chunks of itself, as it did with Daimler and Toyota before its 2010 IPO, and more recently to Tencent, with the Chinese company taking a 5% stake.

Still, don't expect Tesla's push to move beyond a carmaker to let up, particularly as auto sales in the US plateau and the industry prepares for a downturn. Tesla needs a non-tradition narrative to see it through its first true downturn with a valuation so epic that it now exceeds more experienced players, such as Ford and General Motors.

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• It's an invitation-only event in Palo Alto with around 80 Wall Streeters and 85 tech startups hoping to win their business. 
• They'll have back-to-back meetings with 10 to 12 specialists in a row, and one or two startups selected from each group. 

Morgan Stanley is hosting its own version of a talent contest— the 17th CTO Innovation Summit — in Silicon Valley this week. It's the biggest yet, with around 65 existing vendors, and 85 startups invited to attend.

The startups are nominated by venture capitalists, and compete in one of Morgan Stanley eight innovation areas, which range from virtual reality to machine learning, cybersecurity to quantum computing. The aim: to find companies to partner with that can help Morgan Stanley meet its own tech objectives. 

The Wall Street bank stresses collaboration throughout, said Shawn Melamed, who leads Morgan Stanley's strategic technology partnerships.

“There is no one technology or trend that’s going to disrupt the industry, it’s the combination and collaboration of a host of technologies and services,” he said. 

As part of this partnership model, the bank recognizes a single firm each year with a CTO Innovation Award. This year, the bank handed the award to Zscaler, a cloud-based information security provider that helps protect the mobile and wireless needs of Morgan Stanley's financial advisers.

Previous winners of the award include Cloudera, which is now a key part of the firm's new wealth management digital platform. 

“Our first meetings at the CTO Summit were truly transformational for our business," Tom Reilly, CEO of Cloudera, said. 

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It has finally come to this: the iconic automobile, the dream machine of the 21st century, is set to become merely a feature of 21st-century infotainment plumbing.

That's the view of Morgan Stanley auto and mobility analyst Adam Jonas. In a research note published Wednesday, he grappled with Ford's destiny in what he called the "Auto 2.0" future:

A constructive view of Ford’s potential in Auto 2.0 is to view the firm’s global car population as mobile real estate, a data pipe ... equivalent to telecom spectrum. With the right strategic repositioning over many years, Ford may be in a position to convert its (roughly) 2 billion of daily vehicle miles traveled into a data harvesting, machine learning, content delivering juggernaut. In today's automobile business model, once the car is sold the OEM loses that customer, giving up the opportunity to generate after sale revenue to other firms in other industries. In the Auto 2.0 business model, we see 100% of the revenue and profit eventually coming from the operation of vehicles in a network.

We're starting to see a lot of this sort of thinking now, as the alleged mass-disruption of transportation pivots from electric cars to self-driving cars to connected/networked cars. Those pivots are largely being forced by well-funded Silicon Valley experiments that thus far have demonstrated no real business case.

Tesla is effectively the only major stand-alone electric carmaker. The global market for these vehicles is only about 1% of total sales; consumers have basically said "no thanks" to EVs. Google has amassed millions of autonomously driven miles with its test fleet, but the company hasn't figured out how to make money on tech. Apple was supposed to be making a car but now probably isn't. Uber rolled out self-driving vehicles in Pittsburgh last year, but its revenue comes almost entirely from human-piloted cars. 

The car-as-data-node idea

Enter the car-as-data-node idea. Because the tech industry has thus far failed to meaningfully disrupt transportation — cars built, cars sold, on an individual basis — or even really taken a genuine shot at the much-vaunted opportunity, it's reverting to a model that it understands and can make money on. Data and software go hand-in-hand, so why not make the next big thing the invasion of that stubborn, rolling sanctuary? 

After cycling through the path of greatest resistance — real-world vehicles — the putative disruptors have slipped back to the past of least resistance: the virtual realm of code and information flows. Hence the techy "Auto 2.0" terminology that Jonas employs. Auto 1.0, for anyone keeping track, was formerly just known as the "car business" and lasted for over a century. 

The whole point of making cars into data pipes is compelling, and Ford's new CEO, Jim Hackett, has offered some intriguing and nuanced ways to make this work in Ford's favor (he hasn't yet laid out any official road maps yet). But the bottom line is that the main purpose of such a pipe would be to sell car owners stuff. And the notion raises big privacy and intellectual-property issues: Who owns the data? Carmaker or car owner? If the latter, then the fat profit margins expected from this business — former Ford CEO Mark Fields thought they could be 20% — might be in doubt.

Pivot city

This lastest pivot, after more than a decade of the car business not really changing all that much, is evidence of a deeply embedded problem with the industry. Automakers are doing quite well these days, making lots of money as consumers buy SUVs and pickups.

But there's no story there. It's just boringly excellent execution quarter after quarter, money in the bank, and consumers presented with a vast array of choices with no automaker able to develop monopoly control of any aspect of the market (save Tesla, with its tiny sliver). If you don't want to lose your money, you can buy Ford's stock at its currently rather depressed price of $11 and collect a generous 5.5% dividend. 

Or you can tell Ford to stop doing what it obviously does well and ask it to make a costly bet that big data is where the action is. Oh, and make sure that you don't keep that big data but instead, share it with tech companies. 

When you start to see a lot of pivots, plot changes, and techno-speak getting into a discussion about a perfectly successful and profitable business, you have to ask yourself what you're really being sold.

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The auto sales boom is over. That's the view of Morgan Stanley analyst Adam Jonas.

On Thursday, Jonas published a note significantly lowering his sales expectations for 2017 — a drop from 18.3 million for the full year to 17.3 million.

This wasn't a tough call. The sales pace for May came in under 17 million for a fourth consecutive month, signaling that another record year is unlikely.

The best case is that 2017 will match 2016's 17.55 million. A pace of 18 million hasn't looked probable for some time, and in any case after two boom years, a jump of 500,000 vehicles sold by the end of 2017 would be a very hot market indeed.

The harder call that Jonas made in saying that the market has topped was to include a reassessment of the market through 2020. 

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A lot of analysts are racking their brains to figure out how to value Tesla's multiple lines of business —  cars, solar, energy, batteries — and determine whether the company deserves a market cap of more than $50 billion.

Morgan Stanley's Adam Jonas has put those struggles behind him and decided to focus considerable attention on businesses that Tesla hasn't even developed yet.

In a research note published Monday, Jonas dug a bit deeper into this over-the-horizon opportunity:

Elon Musk ... has been outspoken about his belief that the company could, one day, be worth more than Apple. ... Could a highly successful Model 3 [launching later this year] and its progeny achieve this? In our view, no. Could an electric, autonomous semi truck achieve this? We don’t think so. Solar roofs… or Tesla Powerwalls? Not big enough. In our view, there’s only one market big enough to propel the stock’s value to the levels of Elon Musk’s aspirations: that of miles, data and content. When does Tesla make the leap to mobility? It’s been more than a year since Mr. Musk first alluded to Tesla Network and we’ve heard very little on the topic since that time. In our view, this quiet period probably cannot last much longer.

To get ahead of Musk and whatever announcement he makes, Jonas made a notable change to his worst-case scenario for Tesla shares, which have been on a tear since the beginning of 2017 and have been trading well above $300 for some time, enabling profitless Tesla to exceed the market caps of highly profitable General Motors and Ford.

Jonas' former "bear case" was $50; now it's $175. 

"Our bear case valuation is one of strategic value, as the level of strategic interest in the transportation sector has even taken us by surprise," he wrote in his note. Essentially, Jonas thinks that a tanking Tesla is worth more than the liquidation value of the company, the basis for his previous bearish analysis.

The bottom line for Morgan Stanley

The bottom line here is that as Tesla has surged, Jonas had reacted by pushing his new-mobility thesis harder. To his credit, he's always been the Wall Street analyst who adopted the most out-there ideas about where Tesla could go. Also to his credit, he's willing to anticipate tremendous upside for a business that Tesla has yet to really create.

The critical notion is that Tesla will capture the mobility market in a way similar to how Amazon commercialized cloud computing. That, too, has become a huge business that didn't exist until quite recently.

One thing to think about, of course: Jonas is simply being pragmatic. If Tesla shares were to swoon from their current level to $50, it would be an epic collapse (admittedly after a run-up that's been devoid of fundamentals). A market correction from the Monday close of $359 or thereabouts to $175 wouldn't be so crazy. So Jonas is bringing his various targets into better alignment with the market's reality — while continuing to advance his very big idea.

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• Morgan Stanley is partnering with the tech firm Twilio to help the firm's army of financial advisers send text messages to clients about their portfolios and current events.
• The partnership is part of a broader strategy at Morgan Stanley to use technology to increase engagement with existing financial adviser clients, target new clients, and digitize time-intensive processes.
• The bank is also planning to roll out a goals-based robo-adviser option for the children of wealthy clients and younger corporate executives.

You're a wealthy individual, and you have a day of back-to-back meetings. Then, something happens to roil the markets. It could be a surprise election result, a geopolitical event somewhere on the other side of the world, or a bombshell news report. You want to know what it means for you and, in particular, for your investments.

Morgan Stanley is planning to answer that question in a text message.

The US bank's wealth-management business is partnering with Twilio to enable financial advisers to text their clients, in a compliant manner, in a bid to increase engagement with existing clients. The plan is for a machine-learning engine to eventually suggest text messages to financial advisers, allowing them to tailor, approve, or reject the suggested communication. There will be enhanced social-media support and video-chat in the coming months, too.

"Interactions between financial advisers and clients should be easy and reflect how people communicate in other aspects of their lives," Naureen Hassan, the chief digital officer at Morgan Stanley, said.

The partnership is part of a digital strategy rollout at Morgan Stanley's wealth-management unit. In addition to increasing interactions with existing clients, the bank is focused on targeting new clients and digitizing processes.

The bank is planning to roll out a goals-based robo-adviser option for the children of existing wealthy clients and for Morgan Stanley stock-plan participants. The bank is one of the largest administrators of company stock plans, but the bank's wealth-management business is largely focused on those already in the C-suite, not those in the early stages of making their way there. That's about to change.

Then there is using tech to speed up time-consuming administrative work. The bank is planning to make more than 25 processes, such as updating an address or authorizing a wire transfer, available online or through the app.

The partnership is also a part of Morgan Stanley's broader tech strategy. The bank last week hosted its annual CTO Innovation Summit in Silicon Valley with about 65 existing vendors, and 85 startups including Twilio were invited to attend.

"There is no one technology or trend that's going to disrupt the industry," Shawn Melamed, who leads Morgan Stanley's strategic technology partnerships, said. "It's the combination and collaboration of a host of technologies and services."

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Bitcoin may have appreciated 300% in the last 12 months, but Morgan Stanley still isn't convinced the cryptocurrency will be a viable currency in the long run. 

In new research published this week, analysts at the bank say that bitcoin (and its counterparts like ethereum) are still more like investment vehicles than fiat currency that you could spend on goods and services. In addition, it said there are few reasons to use bitcoin instead of a debit or credit card, as it represents a "marginally more inconvenient way to pay."

Here's Morgan Stanley:

Most regulators and investors view cryptocurrencies more as assets than actual currencies. Their values are too volatile and too hard to actually use for payment for most to consider them currencies. Our conversations with some merchants indicate that, while cryptocurrencies might actually be attractive for them to operate their businesses, they find that the cryptocurrencies are far too volatile to be used.

The huge rise in the price of bitcoin is perplexing to the bank, which says other factors should have brought bitcoin's value down. These include the SEC's rejection of a bitcoin ETF proposed by the Winklevoss twins, declining trading volumes, and a Chinese crackdown on bitcoin miners, without which "transaction time for Bitcoin could increase substantially," says Morgan Stanley. 

"It is not clear why cryptocurrencies are appreciating so rapidly (apart from the appreciation itself drawing in more speculation against a potentially inefficient ability to sell)," the bank said in a note. 

Still, Morgan Stanley has some guesses as to why bitcoin has seen such a catastrophic rise:

1. ICO's, or Initial Coin Offerings: Instead of traditional public offerings or funding rounds, a handful of companies have begun offering investors digital tokens in exchange for cash. In on high-profile case, a tech startup called Aragon raised $12.5 million in less than 15 minutes in its ICO. 
2. China: There are strict limits on currency outflows in the country, and Morgan Stanley assumes many people are using cryptocurrencies as a way to bypass the limits. 
3. Korea and Japan: Bitcoin was just legalized by the Japanese government, so it makes sense that it would be gaining popularity in the country. "In Korea, however, there is not a clear explanation for the surge," the bank writes. 

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Major Wall Street banks have been investing in blockchain technology for years now, but few products have yet to actually reach the market. That's because we're still in a "proof of concept" phase, according to new Morgan Stanley research published this week. 

"Whilst Blockchain, or distributed ledger technology, has been around for a number of years, it has only really begun to gain traction in the mainstream in the last 12 months," write analysts at the bank.

One company that's leading the way? BNY Mellon.

Morgan Stanley says the custody giant has created a parallel infrastructure using blockchain technology. BDS360 (short for Broker Dealer Services 360) monitors the custodial bank's ledger simultaneously and creates a second, redundant ledger that serves as a backup record. It's been up and running since March 2016. 

Here's how it works:

It "provides a cost-effective way of adding extra layers of resiliency to the current platform," the bank said in a note. 

BSD360 is the closest thing to a market-ready product, says Morgan Stanley. All that's left is to roll out is client-facing portions, which comes with its own set of challenges. 

"There is still work to be done to figure out the specifics of client interface," says Morgan Stanley. "BNY Mellon would also need to engage in regulatory dialogues, and establish necessary standards and protocols. We think BNY Mellon is well positioned to take on those challenges, with ~85% market share in the [bond] space."

Since it's only internal, and merely duplicates the current settlement processes, it's not a cost-save move by BNY Mellon. Rather, it's a cheap way to add another layer of resiliency, according to Morgan Stanley. 

Other examples of blockchain experiments include the Australian Securities Exchange, Monetary Authority of Singapore, and Ripple, a blockchain startup that wants to break SWIFT's stranglehold on intra-bank messaging.   

These proofs of concept are paving the way for cost-saving innovations, but there's still a long way to go. 

"Adoption of some form of Blockchain technology by incumbents is likely," writes Morgan Stanley. "Given the amount of collaboration required, we expect it could take several years to replace existing back office functions."

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