Morgan Stanley Says time to buy Tesla

Morgan Stanley sees value opportunity while Citi upgrades.

Shares slumped 52% this year with $300b wipeout in two months.

After losing nearly $300 billion in market value in two months, a growing chorus of Tesla Inc. analysts say the share-price decline has gone far enough.


Morgan Stanley analyst Adam Jonas said on Wednesday that Tesla is approaching his “bear case” price target of $150, presenting an opportunity for investors to buy at a bargain price. Citi analysts upgraded the shares to neutral from sell, saying that a more than 50% slump this year “has balanced out the near-term risk/reward.”


Tesla's third-quarter earnings results were notable for revenue and cash flow growth, though production efficiencies can still be optimized.

The EV maker cut prices on two flagship models in China on Oct. 24, signaling a more competitive environment as rivals begin to gain traction in that market.

Despite challenges including decelerating demand and price cuts in China, Tesla is the only electric vehicle maker covered by Morgan Stanley that generates a profit on the sale of its cars, Jonas wrote in a note. The analyst -- who also highlighted Tesla’s potential to benefit from consumer tax credits in the US -- reiterated his $330 price target.

Shares rose as much as 1.9% in premarket trading to $173.11. The stock has slumped this year amid rising raw materials costs, issues with production and sales in China and pressure on customer budgets.

The distraction caused by Twitter needs to end to stop the stock slide, according to Jonas. “There must be some form of sentiment ‘circuit breaker’ around the Twitter situation to calm investor concerns around Tesla,” he wrote.

Citi analyst Itay Michaeli, who upgraded the stock on Wednesday, has one of the lowest price targets on the Street, at $176. The analyst said he was turning more positive because Tesla’s slump means that some of the overly-bullish expectations in the stock, including on unit sales, have now been priced out.

Month on Month.


Despite all of the challenges Tesla has faced this year, Wall Street has mainly stayed bullish. The majority of Tesla analysts tracked by Bloomberg rate the stock a buy or equivalent, while the shares would need to rally a whopping 80% to hit the median analyst target price. This year’s slump has left the stock trading at 31 times forward earnings, down from more than 200 times in early 2021.


Recent earnings.

Tesla's (NASDAQ: TSLA) earnings release last month reflected both the positive aspects and the growing pains of the massive production ramp-up happening in its Austin, Berlin, and Shanghai Giga factories. On the plus side, the electric vehicle (EV) maker was able to improve revenue by 56% to $18.7 billion in the third quarter, and it reported a huge free cash flow haul of $3.3 billion. On the minus side, despite its sales surge over the prior-year period, Tesla didn't produce leverage in its gross margin; in fact, automotive gross margin declined by 2.6 percentage points to 27.9% versus the comparable quarter.

The gross margin weakness can be traced to a number of obvious factors, including a stronger U.S. dollar, continuing logistics issues, and supply chain kinks -- all issues that currently affect most global manufacturers. Some of the slippage in automotive gross margin is also due to Tesla's tendency to do a push in production near the end of each quarter to meet internal goals. To be blunt, that's an expensive way to operate, and management has stated its desire to have more consistent manufacturing throughout each quarter. All in all, however, it's only fair to mention here that the company's operating margin of 17.2% in Q3 is well above profitability levels typically achieved by its non-EV auto-making rivals.


In October, Tesla decreased list prices on its vehicles sold in China, lowering the base price of the Model 3 sedan by 5% and cutting the base price of the Model Y SUV by 9%. The price cuts raised concerns among investors that the brand prestige Tesla has enjoyed in China -- and its accompanying pricing power -- may have waned a bit as rivals, especially Warren Buffett-backed electric automaker BYD (OTC: BYDDY), begin to gain traction in the Chinese market. BYD reported record sales in its latest quarter, delivering approximately 259,000 electric vehicles versus Tesla's roughly 344,000 EV deliveries.


Future.

Markets aren’t reacting too well to Musk’s takeover of Twitter. Tesla investors fear that Twitter could be a distraction for the entrepreneur. Musk’s selling of TSLA shares to fund Twitter is not going down well with its shareholders. Earlier this month, Musk liquidated more Tesla shares following his Twitter acquisition. He sold 19.5 million shares worth close to $4 billion, bringing the total value of Tesla shares sold by Musk to roughly $20 billion so far this year. A big concern of TSLA shareholders is that Musk will be spread too thin across all his responsibilities because of the Twitter takeover. Speculations are rife that the widely-hailed Tesla CEO doesn’t have enough time on his hands to navigate both companies properly.

The stock was also hurt by the recent price cuts for its EVs in China. Tesla slashed the prices of Model 3/Y cars as much as 9% in China during late October amid signs of softening demand and rising competition in the world’s largest car market. Tesla is hardly immune to the supply-chain issues, and economic uncertainty and aggressive rate hikes are making matters worse for the automaker.


Long-Term Prospects Still Strong

The world is doubling down on EV adoption with government subsidies, policy changes and infrastructure buildup. And Tesla has gradually established itself as a leader in the e-mobility space. This should be the perfect backdrop for solid growth into the foreseeable future. Tesla has a 5-year expected EPS growth rate of 31.4%, higher than the industry’s 18.7%.


Conclusion

As Tesla's shares have slumped in the red year to date, long-term investors are therefore presented with an opportunity to buy the dips at a level not seen in some time. TSLA’s valuation multiples fell extensively, perhaps enticing investors with a long-term horizon. Further, Tesla has a strong growth profile, with revenue and earnings projected to soar by double-digit percentages in its current year and next. We believe, Tesla is a solid long-term investment option at current price levels based on its market leadership, progressively broadening global operations and new product developments that promise to take it to dizzy heights in the coming years.