EV giant Tesla Inc (NASDAQ:TSLA) has replaced Ford Motor Co (NYSE:F) as Morgan Stanley's "Top pick" in the U.S. auto industry.
Analyst Ratings: Morgan Stanley has a price target of $310 for Tesla and $16 for Ford. This is an upside of nearly 34% from Tesla's closing price on Monday, and nearly 45% for Ford, according to Benzinga Pro data.
What Happened: Morgan Stanley said in a note on Monday that Tesla is cutting costs in the auto segment and also redeploying resources to other business segments as EV demand falls.
Tesla will have more automakers looking to buy zero-emission vehicle credits from it as legacy players pull back on their EV plans and service revenue should grow as Tesla's car population increases, the brokerage noted, while adding that margins derived from after sales and service are typically far higher than sale margins.
"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," the note reads.
Morgan Stanley also sees potential for Tesla's Energy business to be worth more than the electric vehicle business, particularly owing to severe storms and unusual global weather phenomena.
In the second quarter, Tesla marked a growth in energy generation and storage revenue as well as services and other revenue even as total automotive revenue fell 7% year-on-year. The company also made a revenue of $890 million by selling regulatory credit to other automakers who lagged on their emission requirements.
Brokerage Concerns: The brokerage, however, warned that the near-term expectations around the company's full self-driving (FSD) driver assistance technology and robotaxi may be too high and that EV demand may continue to dwindle.
As per Morgan Stanley, the commercial opportunity of non-auto expressions of embodied artificial intelligence is likely far larger and faster adopted than that of autonomous cars. It is also 'highly unlikely' that the company would be allowed to operate autonomous vehicles in China, its second-largest market, the brokerage noted.
"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," the brokerage said.
Tesla is currently gearing up to unveil its dedicated robotaxi product on the 10th of October.
Price Action: Tesla shares closed up 5.6% on Monday at $232.10 and Ford shares closed down 1.6% at $11.01. While Tesla stock is down 6.6% year-to-date, Ford is down 9.5%, according to data from Benzinga Pro.