Morgan Stanley reiterated an Overweight rating on “Top Pick” Tesla (NASDAQ:TSLA) with a 12-month price target of $380.00 on the stock after the electric automaker was forced to recall over 2 million vehicles to address a faulty autopilot system.
Morgan Stanley analysts wrote in a note, “In our opinion the essential tech is good. The in situ alerts and product marketing were overdue for tweaking. Tesla is still leading on edge AI that 'moves.'”
With over 4 million vehicles equipped with Full Self-Driving (FSD) capabilities on the roads and an estimated 500,000 paying FSD customers, Tesla possesses a vast reservoir of data to continually enhance its machine learning algorithms.
Despite Tesla's confidence in this area, ongoing investigations by the NHTSA regarding several accidents raise legitimate concerns about the safety and reliability of the autopilot system.
Of the $380 price target, Morgan Stanley’s valuation of the ‘core’ auto business is $86/share, which represents only 23% of the target. The remaining 77% of the target is attributed to Network Services, Mobility, 3rd-party battery/FSD licensing, Energy, and Insurance.
Their Overweight thesis is highly dependent on these business lines becoming significant revenue drivers, supported by concrete milestones and financial disclosures.
Addressing the recent recall, Tesla plans to release an Over-The-Air software update at no cost to consumers, with notification letters anticipated to be sent by Feb 10, 2024. Morgan Stanley does not anticipate any substantial cost impact during FY24 related to this recall.
Looking ahead, Morgan Stanley forecasts Tesla's earnings per share (EPS) to grow at an annual rate of 27% until FY30. They expect EPS to reach $5/share by late FY25, $10/share by late FY27, and $15/share by mid FY29. They stress the importance of considering both near-term challenges for FY24 and the long-term potential of Tesla's products and services.
Shares of TSLA are up 0.41% in morning trading on Friday.