Tesla gains as Morgan Stanley lists it as top automotive stock pick

Tesla (NASDAQ: TSLA) gained over five percent in Monday morning trading as Morgan Stanley listed the automaker’s stock as its top pick in the automotive sector, despite some firms advising short-term caution as the automaker works through margin pressure and a lower growth rate.

The company was trading at around $230 per share on Monday after the gain. Tesla replaced Ford as Morgan Stanley’s top pick.

Adam Jonas, an analyst at Morgan Stanley who has covered the automotive sector for several years, is well aware of Tesla’s prowess. Holding a $310 price target and an ‘Overweight’ rating, Jonas reiterated his consensus on the stock in a new note on Monday but called Tesla his favorite position in the automotive sector.

Tesla ‘must see stabilization’ in auto business, but analyst believes other strengths overlooked

Cost Cutting/Restructuring

Tesla came within 3 or 4 percent of consensus expectations when it reported earnings last week, which is a big upside for Morgan Stanley:

“The over $0.6bn of restructuring charges recognized by Tesla in the quarter, combined with other actions, has helped lower the breakeven point to levels where Tesla can still generate positive cash flow at an enterprise level, even with EV capacity utilization at 69% last quarter. While Tesla is still making cars, we note the company is aggressively redeploying incremental resources, technology, people, and capital away from the auto side of the house. We found it notable that Ford management spent far more time on its 2Q conference call discussing EVs than Tesla did.”

Cornering ZEV Credits

Jonas believes Tesla could be in a prime position to “achieve an even more dominant position in the market” as OEMs pull back EV plans:

“We anticipate other car companies such as GM and STLA may be wading more deeply into the ZEV market as buyers in the quarters ahead. 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.”

China Risk Management

Tesla China contributed to 18.2 percent of the total revenues for the most recent quarter, Jonas wrote in the note. With increased competition in the market and a robust list of companies that are offering competitive products, Morgan Stanley believes China will account for 10 percent of Tesla’s auto unit volume and up to 7 percent of group revenue.

Tesla is doing a good job of not being too reliant on the Chinese market, as competition is robust.

Strong Energy Portfolio

Energy had a great quarter, setting a record for project deployments by more than doubling its previous record.

Jonas writes:

“Investors are focusing on the theme of Gen AI acceleration spurring a multigenerational increase in energy demand and a recent ~2x beat in 2Q Tesla Energy storage deployments with gross margins roughly 2x that of the auto business.”

Tesla Energy posts record 9.4 GWh of battery storage deployed in Q2 2024

Tesla was up 5.98 percent at 10:35 a.m. on the East Coast.

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