FYI: Tesla receives a significant boost as Morgan Stanley ranks its stock as the top pick in the automotive sector.
Tesla (NASDAQ: TSLA) surged by over five percent in Monday morning trading, following the announcement from Morgan Stanley that the automaker is now its top pick in the automotive sector. This puts Tesla ahead of Ford, despite some firms expressing short-term caution due to Tesla’s margin pressures and slower growth rate.
At the close of the trading session, Tesla’s stock was hovering around $230 per share. Adam Jonas, a seasoned Morgan Stanley analyst known for his extensive coverage of the automotive industry, has a $310 price target and an ‘Overweight’ rating on Tesla. He reiterated his support in a new note on Monday, highlighting Tesla as his preferred stock in the automotive sector.
Cost Efficiency & Restructuring
Tesla recently reported earnings that fell within 3 to 4 percent of consensus expectations, a notable positive according to Morgan Stanley. The firm’s latest earnings report included over $600 million in restructuring charges, which contributed to lowering the breakeven point to a level where Tesla can still generate positive cash flow. Even with EV capacity utilization at 69% last quarter, Tesla’s financial maneuvers indicate a robust approach to cost management.
Morgan Stanley observed that Tesla is reallocating resources, technology, personnel, and capital away from auto production to other areas. Interestingly, Ford’s management dedicated more time to discussing their EV initiatives in their 2Q conference call than Tesla did.
Dominating ZEV Credits Market
Jonas suggested that Tesla could achieve an even more dominant market position as other OEMs scale back their EV plans. He anticipates that companies like GM and Stellantis (STLA) will venture further into the Zero Emission Vehicle (ZEV) market. Tesla is expected to account for half of the credit sales in the market, which supports a 100% margin business—a factor that may not yet be fully appreciated by the investment community.
Navigating China Risks
Tesla’s performance in China, which contributed 18.2% to the company’s total revenue for the most recent quarter, was also weighed in Jonas’ analysis. As competition intensifies, Morgan Stanley expects China to account for 10% of Tesla’s automotive unit volume and up to 7% of overall group revenue. Tesla appears to be managing its reliance on the Chinese market effectively amidst strong local competition.
Robust Energy Segment
The energy division of Tesla had a stellar quarter, setting records in project deployments and more than doubling its previous records. Jonas highlighted that investors are increasingly focusing on the growing demand for energy, driven in part by generative AI acceleration. Tesla’s energy storage deployments exceeded expectations in 2Q, boasting gross margins approximately twice that of its automotive business.
Tesla saw an increase of 5.98 percent at 10:35 a.m. on the East Coast, reflecting strong investor confidence following Morgan Stanley’s endorsement.
Summary:
Tesla experienced a notable stock surge as Morgan Stanley upgraded its position to the top pick in the automotive sector. Despite short-term challenges related to margin pressures and a slower growth rate, Tesla’s strategic restructuring, dominance in the ZEV credits market, effective China risk management, and a robust energy segment underscore its strong market position and future potential.
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William Kouch, Editor of Automotive.fyi
