Analysts from Morgan Stanley on Tuesday warned that Tesla stock, at over $1,000 per share, is grossly overvalued and set to plunge, with too many investors ignoring the risks of running a car company and instead treating Tesla like a high-growth tech company.
After surging to record highs of over $900 per share in February, Tesla’s stock plunged amid the coronavirus sell-off in late March, falling below $400 per share.
But shares have since seen a strong rebound: Tesla is up 130% since the market’s coronavirus recession low point on March 23, and now trades for over 1,000 per share.
In a note to clients on Tuesday, Morgan Stanley analyst Adam Jonas warned that while he understands the “attraction of the Tesla story” and its high-growth potential, it is still hard to see Tesla justifying its high stock price over the next decade.
He gives the stock a $650 price target and an “underweight” rating, warning that investors are ignoring “a host of execution/market risks” facing the company.
Morgan Stanley said that it forecasts Tesla to make 2 million cars annually for the next 10 years, but its current stock price implies a much higher production output: “At $1,000, we believe the stock is discounting roughly 4 million units” by 2030.
The company’s high valuation is coming from “tech-oriented investors” who see Tesla’s valuation as reasonable and “in the framework of discussion” amongst large-cap tech names like Amazon, Google or Apple.
But comparing Tesla to these tech giants is far from perfect, Jonas says: It still faces a multitude of risks associated with running a car company that the market seems to be ignoring.
When comparing Tesla to big tech companies like Microsoft or Apple, “one would have to consider (or ignore) significant inherent differences in Tesla’s business model and capital intensity,” Morgan Stanley said in its note. “One must also take into account many of Tesla’s business objectives face a degree of execution risk that may be significantly higher than many of the more proven/mature companies in this analysis.”
What to watch for
When Morgan Stanley first downgraded Tesla to “underweight” on June 12, the firm identified three primary risks: Near term risks to demand and pricing, longer-term risks to its business in China and potential competition from other big tech companies. But investors didn’t react much to the bank’s downgrade. Why? According to Morgan Stanley analysts, “We believe that investors are in a little bit of a ‘wait and see’ mode, looking for more clarity around the potential lasting impacts of COVID-19.”
With Tesla’s stock rising to new record highs in 2020, so has its market valuation. The company now boasts a market cap of $185 billion—up from just $75 billion at the end of last year, making it one of the most valuable car companies in the world. In fact, it is now worth more than Ford, General Motors and Fiat Chrysler combined. Since April, founder and CEO Elon Musk has grown his net worth from $24 billion to just over $42 billion.
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