Investors in cult stock Tesla Motors Inc (NASDAQ:TSLA) are jumping for joy this morning. Bulls in the electric vehicle (and now green energy) company received a major boost when automotive analysts at Morgan Stanley praised the firm’s recent moves.
Given four reasons, analyst Adam Jonas blessed TSLA stock with a coveted “overweight” rating and higher price target. Of course, investors in Tesla stock went bananas and sent shares surging on the news.
But should investors in Tesla and Elon Musk’s vision be jumping for joy? There’s still plenty of uncertainty that comes along with an investment in TSLA stock, and none of the reasons Jonas gave are any different than what some analysts have been saying all along.
In the end, the upgrade could be pretty meaningless and certainly justifying a big bump up in TSLA stock.
Four Reasons for a Higher TSLA
The reason for Morgan Stanley’s upgrade of TSLA stock comes down to four factors. In Jonas’ research note, he highlights an improving “competitive landscape” for Tesla, as competitors abandon their plans and the prospects for EVs strengthen under Trump’s manufacturing policies. Jonas raised the price target on TSLA shares to $305 from $245 by the end of 2017.
The bulk of Morgan Stanley’s thesis resides on the upcoming launch of Tesla’s Model 3. The Model 3 is considered a make-or-break addition to the Musk’s repertoire, as it is designed to get EV’s into the hands of the masses. Production and delivery delays have plagued the Model 3 launch, but Jonas sees a soft launch of the car during the fourth quarter of 2017 and significant production coming online during 2018.
The change of heart for Jonas came when he visited Tesla’s Gigafactory last month and saw some potential in rising Model 3 production. That potentially higher production comes on the winds of less competition from rivals.
Jonas highlights the fact that Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has turned its driverless car efforts toward making people better drivers rather than building fully autonomous vehicles. Less interest from Apple Inc. (NASDAQ:AAPL) in self-driving cars, too, is a net-positive for Tesla. Morgan Stanley also highlights overall EV adoption rising to 23% of total vehicles by 2030, versus previous estimates of just 16%. A better political environment was also cited as a reason for the upgrades.
Hold on a Sec, Tesla Bulls
The problem with Jonas’ reasoning is that most of them don’t hold too much water. In fact, a couple of them are outright absurd!
For starters, I’m not sure what political environment Jonas is living in, but the election of Donald Trump pretty much changed the narrative on green technologies. Aside from the fact, Trump has pushed a pro-fossil fuel agenda, subsidies for green vehicles could be on the chopping block. The issue is that the Model 3 is designed to be the EV for masses. But without those subsidies, it doesn’t make much sense for the average person to buy one. And already lower gas prices have pushed more Americans to buy trucks and SUVs.
As for his estimates of Model 3 production, Jonas cites the potential of the Gigafactory, not actual statistics. The factory, while starting to cook, isn’t even fully operational. Getting behind the “potential” of higher production before the facility is even finished is just plain silly. Even then, his estimates for soaring Model 3 production are lower than initially expected.
And while Jonas praises global EV adoption, even he predicts that Tesla’s market share total will drop from 10% to 4.5% by 2030. So much for Apple and Alphabet not caring about electric vehicles! There’s plenty of other players waiting to take up their flags.
Finally, Jonas — who is an automotive analyst — has even said that he has assigned “zero value” to Tesla’s buyout of SolarCity. Much has been written about how the purchase of Musk’s solar operation was really a buyout and that SolarCity’s business model didn’t work on the profit front. When looking at debt and other issues at SCTY, the purchase is immensely risky for Tesla and its operations.
Bottom Line on TSLA Stock
The underlying point isn’t to disparage Jonas or his upgrade, it’s just that much of the reasoning behind the new price target is either based on “potential” or false logic.
A lot of this has already been baked into the TSLA stock price over the past few quarters and some of the other reasons — like Trump being pro-EV because of one meeting with Musk — just doesn’t make sense.
In the end, much of the TSLA stock story has been driven by hope and promises. But remember, Tesla is barely profitable. Buying a stock based on “hope and potential” upgrades usually doesn’t turn out for the best long term. But the “Cult of Musk” probably won’t care until the music stops.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
