The Monster Move: Thank you Morgan Stanley
Today TSLA gapped up and made a monster move, hitting a $259.20 all-time high at one point but fading some to close at $247.95 (up 14% from previous close of $217.65).
The move was caused by a massively monumental price target increase by Morgan Stanley who raised their price target to $320 (from a previous $153). I had a chance to read the report last night and was very impressed by the research and presentation by Adam Jonas and his team. The report is 50 pages and I’ll share the main thesis for those unable to read it.
Surprisingly Morgan Stanley’s massive price target increase is mainly due to not Tesla becoming a better car company. Rather, Morgan Stanley is positing that Tesla is actually three companies in one - a car company, a energy storage company, and an autonomous driving company. In their report they make the case that the markets for energy storage and to some extent, autonomous driving, are huge markets if looked over a 20-year horizon. They claim that Tesla is currently in a dominant position in these two markets and that Morgan Stanley has had to adjust their expectations and assessment of the company as a result. So, they are no longer basing Tesla's valuation as a pure car company but rather as a car company, a battery storage company and as an autonomous driving company.
They give a base price target (1 year out) of $320, a bear price target of $100 and a bull price target of $500.
I’ve read my share of analyst reports on TSLA (thanks to generous people who I’m very thankful to), but Morgan Stanley’s report is one of the best I’ve read on TSLA. Last week Deutsche Bank downgraded TSLA to a Hold (but raised their price target to $220 from $200). They cited concerns that they couldn't justify a higher price target than the $220 they were giving. But Deutsche Bank was looking at Tesla as mainly a car company selling 450k cars in 2020. However, Morgan Stanley makes a point that a company like TSLA, which is disrupting multiple industries over a long period, shouldn’t be based on valuations looking a few to several years forward. Rather, Morgan Stanley makes a case that we should look 15-20 years forward and then discount the value to present. This is another reason for their bullish price target increase. They reason:
“We argue Tesla cannot be valued on near-term multiple metrics like traditional auto companies given that we expect Tesla to multiply revenues by more than 10x from 2013 to 2016 by nearly 30x by 2020 and around 60x by 2028. We have thus chosen a 15-year time horizon for our DCF which captures the full maturation of the Model S, Model X (and top-hat derivatives) and also the ramp up of its mass market electric vehicle (the Gen 3).”
Let’s take a deeper look into these three markets - autos, energy storage, autonomous driving.
1. Autos
Morgan Stanley’s base case ($320 1-year price target) is based on the following:
“Successful commercialization of Model S, X and Gen 3 with combined volume surpassing 1.1 million units by 2028. A thriving company with OP margins peaking at 16.4%, normalizing at 15%. A successful Model S and X with combined volume nearly 150k units by 2020. Gen 3 volume reaching 220k units by 2020 and 775k by 2028. 8% OP margin reached in 2014, peaking at 16.4% by 2019, normalize at 15.3%. Our valuation includes $15 for regulatory credits (a $1.9bn EV).”
These seems quite reasonable and I personally believe Tesla will be able to easily surpass 1.1m units/year by 2028. I have no issues with Morgan Stanley’s numbers regarding autos.
However, this is just part of the valuation they’re giving Tesla.
2. Energy Storage
Morgan Stanley labels the electric utility market as a $1.5 trillion addressable market (compared to autos as a $2 trillion addressable market). They assert that the current U.S. energy storage capabilities are “antiquated and limited” (relying on 95% pumped hydro) but that batteries hold they key for grid/energy storage. They reference a source (Avicenne, Roland Berger, October 2012, Armadee + Company, 2011) as forecasting the Li-Ion battery market to be over $40b in 2020 (from $10b in 2010) with storage and automative sectors accounting for most of the growth.
However, from Morgan Stanley’s report it’s unclear exactly how much and to which markets will Tesla be selling batteries as energy storage to. I look at Morgan Stanley’s report as more of an intro to the huge possibilities of energy storage that Tesla could enter and while Morgan Stanley doesn’t seem to have concrete figures on revenue expectations, they’re leaving it open that this is a huge business area and should be incorporated into the valuation of Tesla.
3. Autonomous Driving
Morgan Stanley introduces a new market called autonomous driving and presents it as a separate market/opportunity than autos. They reason that fully autonomous driving will arrive within 20+ years and that autonomous driving will be made up of 40% hardware (ie., the car), 40% software, and 20% content (what you do while you sit back and relax). So, the report is saying that Tesla is by far in the dominant position in this area of autonomous driving. Not only will it save a ton of productivity time for people (they’re estimating $507b/year) but it will also come at a premium compared to cars without this feature (ie., $10k extra). Tesla will also be able to take advantage of providing content to users in autonomous cars (ie., imagine renting a movie or downloading an app while your car drives you to your destination).
While I’m unclear if autonomous driving really is a 3rd separate market from autos and energy storage, I can definitely see the point that Tesla is far, far ahead in this area of autonomous driving compared to existing ICE companies. Tesla operates like a tech startup that is relentless in iteration and thinking outside the box. And as Tesla iterates on “auto-pilot” (as they like to call it), the features will only become better and better over time, adding increasing value to the consumer and further differentiating their vehicles from others.
Why Morgan Stanley’s report matters
The reason why Morgan Stanley’s report is important is because it provides a different (and convincing) way to value TSLA. Previously most valuations looked at Tesla as purely an auto company with maybe the possibility of entering into energy storage but that looked very undefined. However, Morgan Stanley makes the case that Tesla is currently the dominant player in the energy storage market and that there is nobody in second place. And not only energy storage, but they’re asserting that Tesla is in a dominant first-mover position in autonomous driving that will bring additional value and revenue to their cars and add additional business models like content.
Overall, this kind of well-thought-out and well-researched report is exactly what is needed to counter the argument that “Tesla is overvalued compared to GM”. In other words, Tesla isn’t just an auto company and shouldn’t be valued like one. Rather, Tesla is three companies in one. Try to value that.
My wife was sharing after she read the report that if Elon Musk started a new company we’d be clamoring to get a piece of the company in the IPO. She remarked that by Tesla getting into energy storage it’s like Elon starting a new company but it’s done inside Tesla (and maybe even a 3rd company, autonomous driving). She said we’re getting a bargain by being TSLA stockholders - two/three Elon Musk companies in one. Got to love that.
TSLA Valuation
Since reading Morgan Stanley’s report, I am now needing to re-evaluate my models and personal price targets for TSLA. I was previously looking at TSLA as primarily an auto company and choosing to wait until the energy storage market/business grows to factor that in to TSLA’s valuation. But with the upcoming gigafactory announcement and Morgan Stanley’s assertion that Tesla is in a dominant position in the energy storage market, I’m finding I’ll probably need to adjust my price targets and models. This puts TSLA valuation in flux, not just for me but for investors as people scramble to make sense of how to value a company like Tesla.
Barring any major negative catalysts (ie., fires, recalls, recessions, etc), 2014 is looking like a great year for TSLA.
Congrats to all Tesla believers on today's monster move.
ps., just fyi, if someone sends me an analyst report via PM/email (hint, hint), I won’t publicly share the actual report. I’ll read it and might reference parts of it in my articles so that the whole community can benefit. And I’ll be very thankful to the person that sent me the report.