Tesla Rises Above Ford: Morgan Stanley Names EV Giant "Top Pick" in US Auto Industry
Tesla Inc TSLA has dethroned Ford Motor Co F as Morgan Stanley’s top pick in the U.S. auto industry. The investment bank highlights Tesla’s strategic shifts toward cost optimization and expansion into new business segments, coupled with the company’s increasingly dominant position in the electric vehicle (EV) market.
Key Takeaways:
- Tesla’s Cost Cutting and Expansion: Morgan Stanley believes Tesla’s focus on cost reductions in the automotive sector, alongside its foray into energy generation and storage, will propel its growth.
- Dominant Player in EV Credits: As major automakers scale back their EV ambitions, Tesla is expected to capture an increasing share of the zero-emission vehicle credit market, contributing to a significant revenue stream with high margins.
- Energy Business Outpaces EVs: The brokerage anticipates Tesla’s Energy business to eclipse the value of its electric vehicle operations, particularly as extreme weather events become more prevalent globally.
- Uncertainties Regarding FSD and RoboTaxi: Morgan Stanley cautions against overly optimistic expectations surrounding Tesla’s full self-driving (FSD) technology and its upcoming robotaxi product. There are concerns about the technology’s time to market and its potential for successful implementation, especially in key markets like China.
- Alternative AI Applications: The brokerage believes the future of autonomous vehicles may lie in applications beyond transportation, with broader potential for embodied artificial intelligence (AI) across various industries.
Tesla’s Strategic Shifts and a Dominance in EV Credits
Despite slowing EV demand, Tesla’s ability to adapt and evolve has captured the attention of Morgan Stanley. The investment bank acknowledges that the company has been strategically cutting costs in its automotive segment, aiming for increased efficiency. Additionally, Tesla is expanding its reach beyond traditional car manufacturing by investing in energy generation and storage. This move into renewable energy sectors is anticipated to provide a significant revenue stream for Tesla.
Morgan Stanley’s analysis emphasizes the company’s growing dominance in the EV credit market. As legacy automakers pull back from ambitious EV targets, they will increasingly rely on purchasing credits from companies like Tesla to comply with emission regulations. This presents a unique opportunity for Tesla, potentially accounting for half of all credit sales in the market.
"We estimate Tesla may account for as much as 1/2 the credit sales in the market, supporting a 100% margin business for Tesla that may not be anticipated by the investment community at this time,” stated the Morgan Stanley note.
This lucrative credit market is expected to bolster Tesla’s profitability, particularly as traditional sales margins in the automotive industry face pressure.
Energy Business: The Future of Tesla’s Success?
Even more compelling is Morgan Stanley’s prediction that Tesla’s energy business may become more valuable than its electric vehicle operations. The brokerage points to a rising demand for energy storage solutions, driven by extreme weather events and an increasing focus on energy independence. Tesla’s substantial experience in this market positions it to capitalize on this trend.
“We estimate Tesla may account for as much as 1/2 the credit sales in the market, supporting a 100% margin business for Tesla that may not be anticipated by the investment community at this time,” stated the Morgan Stanley note.
Tesla’s performance in the second quarter reflects the growth potential of its energy business, with revenue from energy generation and storage nearly doubling year-over-year.
The FSD and RoboTaxi: Unrealistic Expectations?
While Tesla’s ambitions in autonomous driving are commendable, Morgan Stanley raises concerns about the current market expectations for its full self-driving (FSD) technology and its upcoming robotaxi product. The brokerage argues that the timeline for widespread adoption and commercialization of such technology is likely to be longer than investors currently anticipate.
Furthermore, the brokerage highlights significant regulatory challenges, particularly in China, one of Tesla’s major markets.
"In our opinion, if Tesla (or any other US company) were to ‘solve’ the robotaxi problem, we believe it would be highly unlikely that the company would be allowed to offer such technology within the PRC. The dual purpose element of embodied AI carries obvious national security sensitivities," stated the Morgan Stanley note.
Embodied AI: A Broader Horizon Beyond Autonomous Vehicles
Morgan Stanley suggests that the future of autonomous driving may lie in applications beyond traditional transportation, focusing on the broader potential of embodied AI. The brokerage believes that this technology can be applied across various industries, potentially leading to faster adoption and greater commercial success.
"The commercial opportunity of non-auto expressions of embodied artificial intelligence is likely far larger and faster adopted than that of autonomous cars," noted Morgan Stanley.
This shift in focus emphasizes the versatility of AI and its potential to revolutionize sectors beyond automotive, providing a more diversified path to growth for technology companies like Tesla.
Price Action and Conclusion
Tesla’s stock surged by 5.6% on Monday following the release of Morgan Stanley’s bullish report, while Ford’s shares dropped by 1.6%. Despite this short-term volatility, Tesla’s long-term prospects appear favorable, driven by its strategic moves and its dominance in the EV credit market.
While concerns remain about the near-term outlook for FSD and the robotaxi ambitions, Tesla’s foray into energy and its potential in embodied AI represent exciting opportunities for the company. As the auto industry undergoes a significant transformation, Tesla’s ability to adapt and innovate has positioned it as a leader in the evolving landscape.
