MS: Model Y, Pickup Truck to Drive Tesla’s Market Share

Yesterday, Morgan Stanley analyst Adam Jonas provided his thoughts on Tesla while maintaining his rating and target price. He expects the company to triple its model line-up in the coming years. Its Model Y and its electric pickup truck are expected to contribute significantly to its share in the US auto market.

We’ll explore Jonas’s thoughts in detail, but first, let’s look at Tesla’s performance and analysts’ sentiments on its stock.

Tesla (TSLA) stock has lost about a quarter of its value YTD (year-to-date) due to concerns surrounding its profitability. In comparison, the S&P 500 (SPY) and the Nasdaq Composite (QQQ) have gained 20.5% and 25%, respectively, YTD.

Tesla stock divides the bears and the bulls like no other. The same is also true regarding “buy” and “sell” arguments for the stock. According to Thomson Reuters, 32 analysts are currently covering TSLA. Of these analysts, 41% recommend “sells,” and 31% recommend “buys.” Their average target price is $252. The target price range from these analysts is also very wide, varying from $140 to $400.

Morgan Stanley’s Adam Jonas has an “equal weight” rating and a target price of $230 on TSLA. This target implies a downside of about 7% compared to the stock’s last closing price. Yesterday, while reiterating his rating and target price, Jonas provided his thesis about the stock. According to Barron’s, Jonas believes Tesla could take a much larger share of the US auto market going forward. To support his view, he said that Tesla’s upcoming Model Y and pickup truck could help it gain a better position.

Tesla is expected to start its Model Y production in fall 2020. The Model Y will be a crossover vehicle built on the same platform as the Model 3. The company launched the Model Y in March. SUVs are one of the fastest-growing auto segments in the US right now. Ford (F) and General Motors (GM), for example, are mainly focusing on SUVs and pickup trucks to drive their revenues and margins. As reported by CNBC in March, Elon Musk said, “We’ll probably do more Model Ys than S, X and 3s combined.”

Another thing Tesla needs now is higher margins from its cars. While its Model 3 is very successful in almost all the markets in which it’s launched, the margin on the model is very low. Despite record deliveries in the second quarter, Tesla reported a larger-than-expected loss in the quarter.

Tesla is hoping to address this margin concern with the Model Y and other new launches. The Model Y is expected to be higher margin than the Model 3. While the Model Y is priced higher than the Model 3, its production costs won’t be much higher. There’s a high level of component overlap between the two.

In Tesla Turnaround Catalysts: China and Model Y Progress, we talked about how the company sees the Model Y as one of the vital components in its drive toward profitability in the medium term.

Another important vehicle Tesla is expected to unveil very soon is its electric pickup truck. Musk highlighted during Tesla’s Ride the Lightning podcast in June that the pickup truck would have a target price of under $50,000. The range for the pickup truck is expected to be 400–500 miles.

Along with SUVs, pickup trucks are one of the only lucrative segments in the US auto market right now. Ford and GM are going all out to preserve their dominance in the pickup truck category. Ford has announced an electric version of the F-150, which is set to launch sometime in 2021. In April, General Motors said that it was also developing an all-electric truck. New entrants, including Rivian, are also expected to give Tesla and legacy automakers a tough fight in the electric pickup truck market. Read more about Ford’s and GM’s pickup truck plans in Electric Pickup Trucks: Could Ford and GM Outdo Tesla?

Tesla is also trying its hand at the rare bright spots in the US auto industry with its Model Y and pickup trucks. You can read more about Tesla’s competition in this space in Could Tesla Dominate the Electric Pickup Truck Market?

Morgan Stanley’s Jonas also said, as reported by Barron’s, that Tesla’s existing models couldn’t drive its sales going forward. Jonas mentioned that Tesla’s Model 3, Model S, and Model X are “either rather old [S], overly engineered [X], or address a shrinking [and] narrow sedan segment.”

Barron’s also reported Jonas as saying that these vehicles address less than 6% of the US light vehicle market. In comparison, BMW and Mini cover about 14%. Due to Tesla’s upcoming new models, Jonas sees Tesla potentially tripling its model line-up.

Apart from Morgan Stanley, Deutsche Bank is also reiterating its “neutral” rating and target price of $243 on TSLA. While DB is optimistic after meeting Tesla’s head of investor relations, it believes the good news has mostly been priced into the stock.