Morgan Stanley’s Adam Jonas, Tesla’s $380 Target Price, Investment Opinion Remains “Overweight”
Strong and bearish scenarios are priced at $550 and $120, respectively
Many investors are still debating Tesla’s advantages of being “more than an automobile company.” In our opinion, Tesla is definitely an automobile company. It is also an AI company.
Introducing Other Thoughts and Events (Outside of Key Automotive Business) May Be Related to Tesla Next Year
- Optimus: Tesla’s AI Day (1H24?) will be an important catalyst for introducing and developing new proximity to Tesla’s technology. Optimus will target a $30 trillion global labor market and run on the same software architecture as FSD.
- Dojo: I think the driving force behind AWS reaching 70% of AMZN’s total EBITDA can also work with Tesla, breaking new markets that extend beyond selling vehicles at a fixed price. What’s the catalyst? Dojo, the customized supercomputing project Tesla has been working on for the last five years.
- Edge AI: The next generation of software-defined vehicles can break the line between the automobile and mobile device markets. Can car keys do more than just open the door? Could a part of the car be ‘with you’? A Tesla car is a robotic edge computer. Could there be space at the edge of the edge for ‘cyberphones’?
- EV Infrastructure: Tesla’s EV production scale gives it an advantage in industrializing the manufacturing standards and supply chain architecture needed to commercialize EVs at affordable prices while mitigating national security risks. Corpus Christi lithium refining operations will continue to grow into 2024. In May, Ford adopted Tesla’s charging standards, and about a dozen other competing OEMs followed suit. With existing OEMs dropping plans for in-house vertically integrated EVs, we believe Tesla is positioned to place greater value on industry rivals in software/FSD, battery hardware, operating system, 48-volt electrical architecture and others.
- SpaceX/Starlink’s ‘Halo Effect’. In discussions with investors about Tesla, SpaceX (especially Starlink) is seen as an important component within Muskonomy and potentially interrelated with Tesla itself. The automotive internet and the computing that supports it will rely on a redundant and resilient communications ‘mesh network’. Starlink is commercializing a whole new communications network.
“Why should we still maintain OW Tesla despite the risk of negative revisions due to safety recalls and slowing EV market?”
- In our opinion, Tesla is more than just an automaker. Of the $380 target price, the “core” auto business is valued at $86 per share, with the remaining 77% derived from network services, mobility, third-party battery/FSD licenses, energy, and insurance. We have received significant pushback from our customers for including non-automotive revenue streams in our valuation. Our OW logic relies heavily on these business segments being an even greater revenue driver with clear milestones/evidence points supported by financial disclosures.
- We believe Tesla has strong FCF growth potential over the long term. As of FY23, Tesla’s EPS is expected to grow at an annualized rate of 27% through FY30, reaching $5 per share by the end of FY25, $10 per share by the end of FY27, and $15 per share by the middle of FY29. While it is important to consider short-term/real-time headwinds in FY24, I think it is also important and reasonable to consider the long-term potential of the products and services the company is commercializing.
- Low Basis – Tesla’s operating margin is now lower than General Motors. A 5% general account-based operating margin (e.g., ZEV) is something many analysts or investors didn’t expect, but that’s exactly what Tesla just achieved, which helped lower market expectations looking ahead to fiscal year 24.
- A strong balance sheet and self-financing business model. Compared to other automotive and automotive-related companies, there is a lower risk of stake dilution due to potential “hard landing” scenarios. We believe Tesla’s fundamentals could be more resilient in tougher economic scenarios compared to competing OEMs. Tesla ended the third quarter with about $22 billion in net cash.
- Tesla’s competitors are expected to significantly reduce their EV investment, giving Tesla a higher level of market share in the coming years, particularly outside of China.