Morgan Stanley has elevated Tesla (NASDAQ:TSLA) to its "Top Pick" in the US autos sector, replacing Ford (NYSE:F). Analysts project a 40% upside, aiming for a $310 target price, underpinned by several factors driving firm value and more managed expectations on autos.
A significant reason for this new status is Tesla's effective cost-cutting and restructuring efforts. The company's second-quarter results aligned closely with consensus expectations, exceeding Morgan Stanley's predictions when excluding restructuring charges and regulatory credits.
The bank explains that with over $0.6 billion in restructuring charges recognized, Tesla has lowered its breakeven point, enabling positive cash flow even with 69% EV capacity utilization last quarter. Tesla's strategic redirection of resources away from auto manufacturing also stands out to Morgan Stanley.
Notably, "Ford management spent far more time on its 2Q conference call discussing EVs than Tesla did."
Tesla's dominance in the zero emission vehicle (ZEV) credit market is another key factor. The company reported ZEV credit revenue of approximately $2,000 per unit, more than double the recent run-rate.
As legacy automakers scale back on EV plans and EPA standards tighten, Morgan Stanley expects Tesla's market position for lucrative ZEV credits to strengthen.
The investment bank also highlights Tesla's effective management of exposure to China risks, with China-sourced revenues at 18.2% in Q2 2024. This figure is expected to decline systematically, reaching about 10% of Tesla's auto unit volume by 2030.
The increasing contribution from recurring services revenue and Tesla's strong position in the fast-growing energy storage portfolio is also seen bolstering the company's prospects. Services and Other revenues rose 21% YoY, with the Tesla Energy business potentially surpassing the auto sector in value.
Additionally, Morgan Stanley sees optionality in new AI and autonomy applications, suggesting that the commercial opportunity in non-auto expressions of AI could be more significant and faster-adopting than autonomous cars. Tesla is positioned at the "epicenter of the theme," making it a compelling investment.