Tesla Motors (TSLA): America’s Fourth Automaker? – Morgan Stanley

Morgan Stanley is out with one of the boldest calls I have seen in a while – Adam Jonas is upgrading Tesla Motors (NASDAQ:TSLA) with a $70 price target, representing almost 200% upside.

His Bull Case? $135 share – 460% upside. According to the firm Tesla will eventually become the 4th major U.S. Auto manufacturer behind GM, Ford & Chrysler.

The details:

There are few things in business as risky as starting an auto company – especially one that relies on entirely new technology that is not likely to be competitive vs. the established internal combustion engine for more than a decade. However, conditions are ripe for new entrants and we believe Tesla can be a significant volume player in the auto industry. We believe the market for xEVs (plug-in-hybrids or PHEVs and pure EVs) is underestimated as rising oil prices and government support accelerate the shift away from the internal combustion engine. This shift has made room for entirely new players to join the ranks of currently entrenched OEMs, and has afforded Tesla the opportunity to establish itself as America’s fourth automaker. The biggest risk remains Tesla’s own execution of its plan.

Flipping the chessboard: The confluence of structural industry change, disruptive technology, changing consumer tastes and heightened national security creates an opportunity for significant new entrants in the global auto industry. California dreaming? We don’t think so. In our view, the conditions are ripe for a shake-up of a complacent, century-old industry heavily invested in the status quo of internal combustion. The risks are high. So is the opportunity. Enter Tesla.

xEV market entering higher volume and it’s happening right now: We are convinced electric cars will comprise a significant minority of global light vehicle sales medium-term and the majority longer term. Our global xEV model suggests penetration of 5.5% globally by 2020 and >15% by 2025. Even on our forecasts, the Internal Combustion Engine (ICE) remains by far the dominant form of propulsion for a very long time.

Tesla moves from rich man’s toy to mass market: We believe Tesla’s long-term independence can only be secured through the commercialization of mass market EVs in the $30k price range. Premium offerings like the Model S and its derivatives are important stepping stones to the company’s full volume potential of 500k units by 2025. We see a path to a company with $9.5bn of sales, >$1.2bn of operating profit and >$1.0bn of FCF by 2020, based on Tesla capturing 3.6% of the global xEV market by that time. The risks of lagging EV adoption, launch delays and balance sheet difficulties make Tesla a highly speculative investment.

$70 PT offers almost 200% upside, on revenue est. roughly 3x consensus in the out years. On our forecasts, Tesla’s biggest financial challenge comes in 2013 when gross liquidity falls to $146mm. As is not uncommon with start-ups, the biggest question is if Tesla can remain solvent long enough to capitalize on the forthcoming technological break-throughs.

Notablecalls: Smells like a once-in-a-life..er..long time opportunity to play a call like this one. It’s a 50 pg note, so people will have lots of fun reading it in the coming days.

There’s a 24% short interest in the name, 10 million shares. At least 2-3 million of these are going to cover in the n-t.

The call isn’t coming from Ehenkrantz & Co, it’s coming from Mother Morgan. Jonas, the analyst is an out-of-box thinker that was early calling the sell on Auto names at the start of the financial crisis.

The upside is huge, so momentum traders will pile on TSLA like mad in the n-t. Imagine the press this call is going to get.

I have no idea how high this one could go in the n-t? up 25%? To $30? Quite possible!

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