It's been nearly two months since Tesla Motors (NASDAQ:TSLA) finalized its acquisition of SolarCity, unifying two of alternative energy's leading lights under Elon Musk's leadership -- and Wall Street hates them both.
According to data from ratings aggregator StreetInsider.com, the past six or so months have seen Tesla stock bombarded with negative sentiment -- a brand-new sell rating (from Cowen), two downgrades (Argus and Goldman Sachs), and two underwhelming initiations of coverage at "hold" (from Deutsche Bank and Berenberg). But finally, at long last, someone had something nice to say about Tesla today.
Morgan Stanley just upgraded the stock. Here are three things you need to know about that.
1. Why Morgan Stanley loves Tesla
In a long, drawn-out sketch of Tesla's several moving parts, Morgan Stanley hit upon three key reasons it thinks investors should own the stock. These include:
- The impending launch of the Model 3 mass market electric sedan, which Morgan Stanley now sees arriving sooner than it had feared, and delivering "a significant positive impact on earnings and our price target."
- Decreased competition from Silicon Valley rivals, with "tech firms" such as Google and Apple no longer seeming as interested as they once were in producing whole branded electric cars on their own. Morgan thinks they're now more inclined to just build bits and pieces of software that Detroit can then insert into the cars that it builds (and presumably, Morgan Stanley sees Detroit as easier than Silicon Valley for Tesla to beat).
- And generally speaking, Morgan believes that America is "moving Tesla's way" in its willingness to adopt electric cars over gasoline-powered horseless carriages. According to the analyst, Tesla "stands at the epicenter of US high tech manufacturing job creation," and will benefit disproportionately as this industry evolves.
Put it all together, and Morgan Stanley is convinced Tesla stock will outperform the market, and assigns the stock a $305 price target -- 25% more than what the stock costs today.
2. Summing up those parts
That's the big picture. Now here are a few specifics.
In working up its valuation on Tesla stock, Morgan Stanley specifically excludes, and assigns "zero value" to Tesla's "Energy" battery business. Instead, Morgan gets the its basic target price from valuing (a) how many cars Tesla is likely to produce, and subtracting from that value (b) the number of cars Tesla failed to produce as promised last year, and (c) the cost of "higher capex" as Tesla builds its business.
Working these numbers, Morgan arrives at a base value for Tesla of $229 per share, which Morgan Stanley admits is "slightly below the current share price."
3. Tesla's X-factor
So how does Morgan move from $229 to $305 on its target price? This is the third part of the equation, and it may surprise you. The company assigns fully $76 in share price to the value of Tesla's proposed Tesla Mobility car-sharing service -- which doesn't actually exist yet.
Its non-existence notwithstanding, Morgan boldly proclaims that "over 100% of the upside to our $305 price target can be attributed to the value we ascribe to Tesla Mobility." And adding $76 to $229, the company finds the entire company to be worth 25% more than it costs today.
That's a big leap of faith that Morgan Stanley is making, granted. But it's worth noting that the analyst has actually ratcheted back its expectations. As the Fool's own Alex Dumortier has noted previously, in 2015, Morgan Stanley said Tesla Mobility could be worth $244 a share to Tesla. And if that prediction turns out to be true, then the stock could literally double from today's $244 share price.
Bonus thing: How much is a Model 3 worth?
Granted, much of the above remains speculation -- the zero value of Tesla's nascent battery business, and the incredible value of the car-sharing business that has yet to begin operations. Meanwhile, Tesla has yet to prove it can earn a profit from any of its businesses over the course of a full financial year. For the time being, the stock is still being valued largely on the volume of cars it produces, regardless of the profits that they do or do not produce.
And this brings us to the final valuable tidbit of information contained in Morgan Stanley's report. According to the analyst, $81 of its $305 price target comes from Morgan Stanley's belief that Tesla will deliver 75,000 "additional" Model 3s in 2018, and "nearly 100,000 units" in 2020. If you crunch those numbers, therefore, it appears that Morgan Stanley is valuing each 1,000 cars sold in 2018 at about $0.50 in added share value for Tesla stock (75 x $0.50 = $37.50 per share), and valuing each 1,000 cars sold two years later at about $0.435 per 1,000 units (100 x $0.435 = $43.50 per share).
Knowing this may give you an idea of what to expect in future upgrades (and downgrades) from Morgan Stanley, as Tesla delivers (and fails to deliver) on its car delivery promises. Simply put, for every 1,000 units that Elon Musk promises to investors, add $0.435 to the stock price -- and for every 1,000 cars that Tesla actually delivers, you can mark up the value of Tesla stock by $0.50.