Morgan Stanley Still Bullish On Tesla

In a note published earlier this month, Morgan Stanley (MS) analyst Adam Jonas reiterated his Overweight rating on Tesla Motors Inc. (TSLA), once again brushing off concerns and criticism from Tesla naysayers.

The note predicts that Tesla will overtake other car manufacturers in terms of producing the highest volume of passenger cars, made completely out of aluminum, as early as 2016. No other automaker uses aluminum in quantities that Tesla expends on its vehicles.

The real secret behind the explosive performance of Tesla’s Model S may not be the power sourced from its electric battery pack, but rather the roughly 200 pounds (33%) in weight savings achieved from an extensive use of aluminum to develop the car’s body – which bolsters the car’s performance and makes it durable. The Model S uses about 660 pounds of aluminum, more than twice the industry average.

Notably, though, the company has been eyeing price cuts on its future cars to better target the mass market. Whether it decides to use as much aluminum for future models remains to be seen.

The note also lashed out at critics who have highlighted safety hazards that arise from the extensive use of electric cars. These cars run with sensitive battery packs, which can catch fire if scorched by sharp objects on the road. Jonas claimed the three cases of a Tesla Model S battery pack catching fire translate into one such occurrence every 100 million miles driven – far better than statistics for all US vehicles that average one fire incident for every 15 million miles driven.

Nevertheless, Tesla has already acted to minimize this risk by installing three layers of aluminum and titanium padding in every Model S made after March 6, 2014. The company has even offered a free upgrade to Model S owners who bought their car before the mentioned date.

In the note, Jonas also reiterated that Tesla’s software network, which connects every Model S to the internet for online updates, is safe from hackers. He said no case of an online unauthorized breach of Tesla’s information database had been recorded.

Jonas, who is Morgan Stanley’s auto analyst, also praised Tesla for successfully breaking the strong foothold of auto dealership lobbies in states like Ohio and New York, and gaining support from the Federal Trade Commission (FTC) and the country’s largest auto dealer group, AutoNation, for a direct distribution model.

He also addressed those who do not see Tesla posting gross margins of 25%, saying that the company had already posted 25% in gross margins on a quarterly basis in the last two quarters, and emphasized his optimistic stance on the company’s battery projects: “‘Giga’ isn’t just an attempt to make batteries at 10x scale. We think it aims to unbundle individual components of the cell (anode, cathode, and separator) to Tesla’s spec across multiple firms, effectively turning today’s cell competitors into tomorrow’s cell component partners.”

Morgan Stanley’s bullish outlook on Tesla follows another similar stance taken in February when analysts at the bank had voiced great faith in the company’s ability to race ahead in the electric-car market, and tap additional opportunities to enter the multi-trillion dollar electric utilities industry and the upcoming market for self-driving cars.

In the note, Jonas retained the one-year target price of $320 on the stock that was first quoted in February. This represents a 54% increase compared to yesterday’s close price of $207.3.

The note, which paints a bright picture for Tesla, failed to address important upcoming catalysts that could adversely affect Tesla in the near future, such as intensifying competition and the company’s hurdles in China.

Tesla closed 1.2% higher on Friday at $207.30, and is up 36% year-to-date.