Morgan Stanley's "Utopian Society" Will Be Built By Tesla Motors Inc. Is It Time to Call a Top?

What's the price of utopia? Thanks to Morgan Stanley (NYSE: MS  ) analyst Adam Jonas, we know: It's $320 a share. That's his new target for shares of Tesla Motors, Inc. (NASDAQ: TSLA  ) , representing roughly 33% more upside (after a morning pop) for a stock that's already gained more than 500% in a single year, a price that would push Tesla's market cap close to $40 billion. In other words, Tesla would be worth about $1.75 million for every single car it sold in 2013 and $1.1 million for every car it plans to sell in 2014.

But $320 a share, or $40 billion -- or any price at all when you think about it -- would be worth paying to reach a "utopian society," which is apparently the long-term opportunity available for Tesla:


Source: Morgan Stanley research report, tweeted by Conor Sen.

This chart, taken from Jonas' report and widely disseminated on Twitter thanks to eagle-eyed New River Investments portfolio manager Conor Sen, shows a path to glory for Tesla beyond simply owning the world of electric cars. This path isn't even connected to Tesla's efforts to build a battery "giga factory," for which Jonas can barely contain his excitement: "If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again. If Tesla can become the world's low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries." 

While the report focuses on disrupting electric utilities, the "adjacent industry" highlighted in the chart above is autonomous vehicles, which is actually closer to Tesla's current mission than a wide-eyed quest to blow up the world's energy infrastructure that Jonas sees as possible. By 2026, we'll supposedly have a completely autonomous road network, which somehow leads directly to "utopian society." Apparently, the only thing standing between us and paradise on earth is the constant annoyance of having to press our own gas pedals and turn our own steering wheels. Save us, Elon Musk!

Optimistically, Jonas also anticipates that Tesla will ramp up its annual production to more than 1.1 million vehicles a year -- by 2028. That would drop Tesla's $320 share price and $40 billion market cap to a more reasonable valuation of approximately $36,000 per vehicle. That's a lot better than today's price, but it's still roughly four times the market cap per vehicle as Ford (NYSE: F  ) earned with a 2013 production run of 6.3 million vehicles. Of course, Ford isn't going to change the world by enticing everyone to switch over to battery-pack power and an automated road network. Only Tesla could possibly do that.

There are several huge fallacies at work with this sort of optimism. To believe that Tesla's opportunity is boundless in electric cars... and energy storage... and autonomous road networks, you also have to believe that from now to the point of mass adoption, no one else will ever effectively compete with Tesla. Alternatively, you can simply believe that Tesla will own so much of each market in the future that a $40 billion market cap today is small potatoes. But both of these beliefs require you to ignore the history of similar technologies and the ultimate value placed on the companies that led their development.


Henry Ford and Elon Musk. Sources: Wikimedia Commons and OnInnovation via Flickr.

Ford didn't make the most technologically advanced cars in the world when the auto's popularity was exploding nearly a century ago; it simply made the most affordable cars that the average person could still enjoy driving. The Ford family kept the company private until 1954, but when it went public, Ford's inflation-adjusted post-IPO market cap reached roughly $32 billion. Its actual market cap today is roughly twice that, so early investors doubled their money in real terms (not counting dividends), but Ford was already producing nearly 2 million cars at that point. Ford's production didn't increase that much from 1926, when its Model T was the most popular thing on four wheels, to its 1956 IPO because other competitors quickly rushed in once the early hype died down and Ford couldn't again hold the public's interest in the same way.

The point here is that no company operates in a vacuum, especially when we're talking about massive multinational industries led by a few multibillion-dollar businesses. Tesla isn't the only company producing electric cars, and as the technology and infrastructure continue to mature, other major automakers will work harder to bring strong models to market.

Tesla isn't the only company working on next-gen batteries, either. That effort has been going on for decades, and Tesla's real innovation wasn't so much in developing something new but in making something old more efficient -- lithium-ion batteries have been powering consumer electronics for more than two decades. Nor is Tesla on the vanguard of driverless-car technology, as Google (NASDAQ: GOOGL  ) has been successfully demonstrating this technology for several years and could very well partner with major automakers to put its systems in all sorts of vehicles. If Morgan Stanley's Adam Jonas thinks that Tesla is on its way to driverless utopia, then why hasn't he already credited Google with planting its flag on that shore?

I'm a big fan of what Musk is doing with Tesla and his other ventures. I believe that a transition to clean energy, electric vehicles, and autonomous road networks would be immensely beneficial to human society and have written about the long-term benefits of this transition many times. I also believe that electric-car skeptics will ultimately be proven wrong, and the numbers back me up on this point -- electric cars are already more popular with consumers at a similar point after introduction than the earliest internal-combustion "motor wagons" were more than a century ago. But that doesn't mean I'm going to climb up and shout it from the rooftops that Musk is our savior and we should all buy, buy, buy regardless of any fundamental realities.

When analysts start talking about utopia, be afraid. These are supposed to be clear-eyed investment professionals, not acolytes of a revolution. Jonas could be serious -- but it's just as likely that Morgan Stanley is fishing for the last Tesla holdouts to dump its shares on before the stock comes back to reality.

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  • Report this Comment On February 25, 2014, at 12:33 PM, Decoy0527 wrote:

    This is fascinating stuff - watching the Tesla stock price plunge on a few car fires, and explode higher on some young analyst's projections. Throwing "utopia" into the mix seems the right thing to do at this moment in time. Most investors who remember the not too long ago internet stock boom are probably shaking their head in wonderment. This gets more interesting each day.

  • Report this Comment On February 25, 2014, at 1:25 PM, hunter3203 wrote:

    Tesla isn't even in the game with regard to autonomous cars. Mercedes has had the technology since the 1990s but knew the world wasn't yet ready for it. Most of the world's major automakers have been working on the technology for years and have even tested it and puts parts of it into production. The Tesla supporters went gaga when Tesla ran an ad for a person to start up their autonomous program last year. The Model S is actually FAR behind its competition with regard to today's autonomous technologies. Virtually all of its competitors offer automated braking, lane departure control, smart cruise control and other active safety measures that are the building blocks for autonomous cars.

  • Report this Comment On February 25, 2014, at 2:20 PM, jeffhre wrote:

    "Ford's production didn't increase that much from 1926, when its Model T was the most popular thing on four wheels, to its 1956 IPO..."

    The people around Henry Ford begged him to offer to greater variety to buyers. Ford's response: threaten to fire executives, and family members, who suggested the Model T be sold in colors other than black (reputed to be the cheapest color available to the company).

    _______________________

    "Virtually all of its competitors offer automated braking, lane departure control, smart cruise control and other active safety measures that are the building blocks for autonomous cars."

    Only one problem with that analysis. No internal combustion motor company has stepped up to "compete" with Tesla. Tesla in economic terms is an incipient replacement for internal combustion motor vehicles. Within that perspective, how will a head start in peripheral, though potentially lucrative, autonomous technologies for future introduction affect Tesla?

  • Report this Comment On February 25, 2014, at 2:25 PM, Brettze wrote:

    Gasoline is a carcinogen , a cancer causing substance that motorists get in contact VERY OFTEN at the pumps. There is a white sign with bold letters stating so... So goes the healthcare spending yet to come , thanks to a surefire rise in cancer cases as post WWII baby boomers are retiring in droves now. We still havent licked cancer which is not a natural disease by any wild definition. It is a damn man man made disease . We get millions of new cancer patients EVERY YEAR! If you think our tobacco lobby is the toughest inside the Beltway, you are probably wrong. It is the Big Oil !! as usual! Big Oil peddles all kinds of toxic consumer products everywhere! Neighbors spray pesticides all over the neighborhoods. We want the uptopian society NOW!

  • Report this Comment On February 25, 2014, at 3:47 PM, Haeze wrote:

    I love how the article compares Tesla to Ford, citing that Ford wasn't worth a hill of beans until they offered the cheapest car available... and that somehow this means Tesla will fail, since they only offered the (expensive) Roadster and (Still somewhat expensive) Model S.

    They seem to forget that Ford started the EXACT same way as Tesla... with a small line of expensive cars, that were each built by hand (The Model A and Model K, both of which were over 4x the price of the competition's cheap cars). From there, Ford started a mass-production line to produce the cheap Model T. The cheapest motorized vehicle by far.

    Tesla started with the Roadster, an expensive hand-built car, and moved on to the Model S, an expensive serial-manufactured car, and is moving on to the Gen III, their Cheap, mass-produced car, which will be the chepest full-range EV.

    When Ford started producing cars, people already had vehicles. They were Horses and Wagons. The same can be said about the full-range EV market compared to ICE vehicles. Full Range EVs are a no-compromise upgrade in every category to the legacy ICE vehicle. The fact that Tesla is the only entrant into this market so far, shows that they are following in Ford's original footsteps. Creating the first affordable full-range electric vehicle that the everyman can buy to replace their old "horse and buggy" ICE car. Yes, there WILL be competition. But they are not nipping at the heels of Tesla, and will face a LOT of hard times, financially, getting to the same level. Can Ford, or GM, or Toyota compete with Tesla ? Absolutely. But the cash outlay to do so would be MASSIVE, and their shareholders will either have to be just as forward-looking, or they will just refuse to spend that much capital. Until they all agree to take the hit and move into the future, they will forever be letting Tesla increase their lead in the market.

  • Report this Comment On February 26, 2014, at 3:36 PM, DrDauger wrote:

    Tesla's only constraint to growth in the market is their own suppliers, batteries being the top of the list, to which the answer is their "Gigafactory".

    Meanwhile ICE car companies are years behind Tesla, and will remain so, because they cannot economically justify discarding their ICE intellectual property, tooling, and manufacturing. To embrace a pure-EV solution, on the books they'd have to write the ICE IP off as billions of dollars in losses, tempting shareholder wrath, hence unthinkable. These ICE-based deeply-ingrained vested interests mandate at best slow change (see their current product line) and therefore cannot compete with Tesla this decade.

    Meanwhile Tesla's window of opportunity is now. They "just" have to execute. Here's hoping they do.

    Disclosure: As a P85 Model S owner, I have seen the future, and it is good. I am long TSLA starting at 35/sh, so I thank all those financing each short squeeze.

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