Morgan Stanley Analyst Adam Jonas joins the On the Move panel to discuss the latest with Tesla, and why its China sales may be non-existent by 2030.
– It has certainly been a volatile month for Tesla shareholders with the surge on the run up to the stock split, and then the sell off that followed the company’s battery day last week. Shares of Tesla are down roughly 20% this month. Let’s bring in Adam Jonas. He is an analyst for Tesla at Morgan Stanley. And Adam, you’ve got this price target of $272 a share– certainly one of the bearish ones on the market.
You’ve had an equal weight rating, though, on the stock. So help me square the two here. A pretty bearish call, with $272 a share, but still an equal weight.
ADAM JONAS: Yeah. I mean, the range of outcomes for Tesla is very wide. We’re kind of gasping for breath as– frankly, the retail investors got this right. I think the long-term software and internet, tech-oriented investor that is [? comping ?] this company, versus a range of other 25% or 30% or 40% or 50% [INAUDIBLE] companies, that’s the lens they use. And we need to see– in order to get our target substantially above where we are today, we have to keep working with our– I kind of need to be a community organizer and keep working with our battery people, our tech and internet experts, to stay ahead of the curve. And it does take industrial kind of crusty folks like myself out of their comfort zone.
So look, our goal case is 527. To get there, I need them to sell about 5 or 6 million units a year by 2030. That’s about double what we currently forecast.
But to go higher than that– and frankly, investors we’re talking to, they want to add a zero to this thing and think that Tesla can be the most valuable company in the world. And to do that, you ain’t doing it with cars. You’ve got to go to units times price. You’ve got to go software as a service. You need full autonomy. And those are things we think investors need more evidence of. Particularly on autonomy, where we think it’s still massively overhyped. We need more evidence there for investors to be compensated.
– And Adam, I know you’ve talked about that even before Battery Day last week. But one of the other things that you note here is that Tesla alone can’t get there. You’ve talked about this call to arms to governments, to suppliers, investors, engineering talent. What specifically are you looking for if you’re talking just government policies here that can be supportive for Tesla?
ADAM JONAS: I mean, look. Coming out of COVID, governments are left with– kind of closer to social disorder and unrest, if not actually seeing it. They’re left with potentially structurally higher unemployment, or higher for longer. They’re left with a populace that want to see– they’re seeing our planet be destroyed and they want change. And, you know, Elon, it’s kind of the right place at the right time. In order– he wants to go around the world. I’d [INAUDIBLE] his tail number. He’s going to be talking to governments everywhere.
And I think the pitch is, look, I’ve got the smartest people in the world working on chemistry and solar and internet of cars. And I’m in position, being a $400 billion gorilla now, I can spend big bucks. But for every $10 billion I spend, I need you spending 100. Let’s do business together. I’ll bring you jobs and a sustainable future, and you help let me set the hegemony. That’s the pitch. It’s happened before in other industries, in other centuries. And he feels [? it’s ?] his time now.
– What does this mean, I guess, as far as investing and looking at Tesla for its battery technologies outside of the auto industry? Is it really just the vehicles, or is it a broader sense of they’ll be able to bring this to bear on electrical infrastructure, on an industrial scale, for towns and cities?
ADAM JONAS: So it kind of– it starts with autos, and that gets them the scale first to then be able to get the costs down, and then the recycling infrastructure in place, to then turn on the grids and do stationary storage, to turn on, you know, more affordable home storage and then these other alternative uses.
But right now, the automotive battery pie is more than enough to move the needle. Maybe not enough for them to make their own vehicle. They would need to kind of sell the $15,000 or $20,000 power train skateboard, so to speak, to virtually every auto company in the world. You need something like that to justify that price.
But just again, we think– again, this company may have arguably the largest [? tam ?] in the world at a time when investors are paying an enormous premium for innovation. I would challenge you to find a company that’s innovating at a faster, more audacious rate than Elon Musk’s company.
What we think is being ignored, though, is that the auto industry going forward is not going to be global, in our opinion. There’ll be national champs. Tesla and other US OEMs will have to find a solution outside of China, because they won’t be able to compete the way they are today. You’ve got to make room for the [INAUDIBLE] cap companies like the Amazons and Apples who are also developing batteries and transportation that are [INAUDIBLE] the real competition, right? And then the reality that autonomy might be closer to 20 years away than 5. Those are some inconvenient truths. It could change. But that’s kind of where– that’s part of the beef we have with what’s in the price right now.
– Adam, Ines here. What do you make of the $25,000 vehicle announcement in three years? Do you see that happening? And how important is this for mass adoption? And do you feel that the pandemic has sort of solidified Tesla’s lead when it comes to the EV space against other manufacturers, especially if they can eventually mass produce batteries and then eventually sell them to other companies?
ADAM JONAS: Yeah. I mean, Tesla in a position right now where most OEMs hope to be in five years where Tesla was five years ago. You know, roughly a 10 year lead. $25,000 car is important. Now look, that might be the starting price. The average price would be $35,000, which is what we’ve expected their compact to be, which we don’t expect to go into production until closer to mid-decade. OK? Maybe they’re able to do a couple of years earlier than that.
But that’s important in order to fill the kind of 3 terawatts hours of supply that they’re talking about. If you assumed half of the 3 terawatt hour target by 2030 goes to cars and the other half is everything else– recycling, aftermarket, stationary storage, you name it. 1.5 terawatts, that’s about 20 million cars. That’s about 100% of our current ED forecast globally. That’s 25% of all cars sold, maybe 30% of cars sold that year. It’s just a massive number. We don’t think they’re going to get there, frankly. But even if they did half that, they’re not going to do it selling $80,000, $100,000 cars. So they’ve got to get the price point down to crack in to the household and to crack into the emerging markets.
– Go ahead?
ADAM JONAS: You asked about the pandemic accelerating Tesla’s lead. I think what it’s done is it’s taken the incumbents and took their sense of awareness and moved it into urgency. You’re seeing how consumers deal with digital. And this idea– I think investors are thinking, huh, why am I going to give capital to a company that doesn’t have any software talent, or really has second, third rate software talent?
So Tesla’s areas of expertise– you know, internet of cars, AI, ML, the vertical integration and the talent, that seems to be accelerating the market’s appreciation of Tesla’s position. And of course, what it’s done to the cost of money and the cost of funds is enabling investors to think 20 years out. I regularly talk to investors that have 20, 30 year DCFs on Tesla. I used to take a lot of crap for having a 5 to 10 year DCF a few years ago. And then we’ve just been– we’ve been swamped by investors that are thinking way beyond that now.
– And speaking of the long term timeline here, and going back to your earlier issue of government policies being supported, we have that ban coming out of California on gas-powered cars by 2035. I’m just curious if you think that is a sign of things to come, if this is just a California specific thing. And more pertinent to Tesla, how supportive do you think that will be of Tesla’s market overall?
– It ain’t just California. Of course, California– it’s way bigger than that. And by the time we get to 2035, you can imagine all the cities that would have outlawed not just the sale of internal combustion but the use of internal combustion. I think most, if not all major cities in California, would have long abolished the use in central business districts.
So listen, we’re talking the fifth largest economy in the world. California has 31 million vehicles. They emit 4 metric tons of CO2 per second in California. They’re in the middle of an environmental catastrophe going on with the fires, and it’s raised awareness. So that’s on full display. I think you’ll see the other Section [? 177 ?] states which account for a third of the US [INAUDIBLE] vehicle market to announce similar targets to California. States like New York, right? You’re going to see them announce.
So this is big. It’s not moving at the pace of the EPA. It’s moving at the pace of cities, states, fleets, tech, and Elon Musk’s imagination. And then the kind of [INAUDIBLE] the fear and the greed of Wall Street that’s always been there pushing us forward.
– You had mentioned earlier about China being an issue for Tesla. They wouldn’t be able to sell there. Give us an idea on that and why [INAUDIBLE]?
ADAM JONAS: Let me give you an idea. So [INAUDIBLE]. Look, you’ve seen it with the tech. You’ve seen it with the other names– some of the stuff going on right now and data privacy, right? Imagine a US– how about let’s [INAUDIBLE] with the question. Can you imagine a Chinese internet of cars autonomous network operating in the streets of Boston in 10 years? Of course not. Wake up. It’s not happening.
And so this idea that the Chinese aren’t allowed to use AI network machine learning data privacy networks from the state, but it’s OK for us to do there, is just a fallacy in our opinion. It’s not in step with the national security discussion that we’re having with our intelligence community contacts when we talk about AI, cyber, and space.
We think that Elon has been invited in, and then he realizes that, over time, things will change. There could still be an [? umbilicus, ?] where Tesla could own a stake in a listed entity. Your guess is as good as mine in China. But we do think that all US companies– it’s not a Tesla specific issue– will be walled off from knowing where the party is operating in China, and where people are going, and what they’re doing, and what their tastes are, just like you don’t see that kind of freedom in other IoT and data networks between Sino and US counter parties at this point. Does that make sense?
– Yeah, I mean, Adam, that makes sense. But I guess that begs a follow. Does your $272 price target factor in–
ADAM JONAS: Yeah.
– –a pullback from China?
ADAM JONAS: Yeah, it does. We have China sales peaking middle of the decade and then going down, and x growth by the year 2027, and then a steady decline, and then eventually nothing after 2030.
– After 2030. Finally, another stock that you cover closely, Virgin Galactic, a big mover in the session today. Up more than 20% after [INAUDIBLE] initiated coverage on the stock with a buy rating. How much more upside do you think there is on that stock?
ADAM JONAS: Our price target is 24, and our bull case is more or less a double on the stock. I think you’ve got to– when we initiate it, you’ve got to take a bit of a biotech type approach to this. Space is hard. Putting humans in space is even harder. There are probabilities that things could go wrong. There’s real tech. But I think, similar to what Tesla’s doing, though, they’re in a position, in a scarce point the market where you’ve kind of got the SpaceX [INAUDIBLE] blue origins. And they’re in that kind of discussion, able to bring in capital, very attractively priced, and talent.
And when you do that, and you have a lead, and you can kind of quasi monopolize human space tourism for a few– space tourism for a few years– there could be some pretty exciting things that happen.
And then you give yourself that optionality to go into hypersonic point to point and come into much larger [? tams. ?] Those multitrillion dollar markets you can disrupt.
So watch carefully. October 22nd is when the window of their ability to send this first of two manned test flights opens up. But I want to make it clear that October 22nd is not a fixed date where they will put humans in space for a test flight. It’s just when a window opens up. That may last a few weeks or a couple of months.
– OK. We’ll be tracking that very closely. Hope to have him back on the show then. Adam Jonas joining us from Morgan Stanley. Great to have you on today.
ADAM JONAS: Thank you.