Electric vehicles (EVs) are "essential, unavoidable, [and] inevitable." That's according to a recent note from Adam Jonas, an equity analyst at Morgan Stanley who's one of the biggest Tesla (TSLA) bulls on the Street with a $900 price target on the stock.
Battery electric vehicle (BEV) sales grew to 3% of the global auto market in 2020, even as worldwide car sales tumbled 15%, according to Morningstar. And the momentum isn't slowing down, as Morningstar predicts EVs will make up 30% of the global car market by 2030.
The transition away from internal combustion engine (ICE) vehicles to BEVs isn't just about technology, economics, or even heightened awareness about climate change, Jonas wrote. Instead, he called it a "strategic and geopolitical battle" that investors have yet to appreciate.
"For every adoption, there is an equal and opposite de-adoption," Jonas wrote. "Yet investors seem more willing to price the 'tailwind' for EVs rather than the 'headwinds' for ICE."
Pure-play EV makers like Tesla will continue to enjoy government support for BEVs as the global crackdown on car emissions continues, Jonas wrote. By contrast, Jonas said regulations will hurt legacy automakers like Ford (F) and General Motors (GM).
"By 2030, legacy OEMs [original equipment manufacturers] will very likely have a materially smaller share of the global auto market and what they will be left with is likely to operate at significantly lower margin[s] than what they are achieving today — assuming there is any margin at all," Jonas wrote.
The stock market will recognize this issue "far sooner" than auto industry experts, Jonas wrote, adding that traditional dealers and suppliers are "categorically at greater risk over time."
EV momentum accelerates despite waning subsidies
For years, EV makers like Tesla were propped up by government subsidies of up to $7,500. The perks have since scaled back, but Tesla's sales haven't missed a beat and the company nearly doubled revenue year-over-year in Q2 2021.
EV growth is sustainable without subsidies, and by 2025, EVs will be cheaper than their ICE counterparts with equal performance, wrote Seth Goldstein, a senior equity analyst at Morningstar and the chair of the firm's Electric Vehicle Committee, in a June research report on the EV industry.
"Once EVs reach cost and functional parity with internal combustion engines, I no longer see regulation or government actions as a big driver of EV sales," Goldstein told Insider in a recent interview. "Instead, I think it's going to be more [that consumers pick] the cheaper and potentially better choice of vehicle for them."
EVs face road bumps: Fires, crashes, and competition
Autonomous driving (AD) will reduce transportation costs, emissions, road congestions, and accidents in the next decade, wrote Chris Yun, a BofA research analyst, in an August note. Two out of three car shoppers are willing to switch brands for the added convenience, Yun added.
But recent high-profile crashes are a jarring wake-up call for AD proponents. Tesla shares slipped as much as 9% after the National Highway Traffic Safety Administration (NHTSA) recently announced an investigation into 11 crashes by Tesla EVs that were engaged in autopilot mode.
In theory, fully self-driving cars are safer than those operated by easily distracted humans, but crashes — though rare — may shake confidence in AD technology and hurt sales. Goldstein isn't a Tesla bull, but said he's not too concerned about the NHTSA investigation hurting the company because Tesla's "autopilot" technology is currently just a fancy cruise control.
"Regardless of what the name is and what the branding might imply to some consumers, the technology itself just isn't ever meant to drive the car on its own without the driver paying attention," Goldstein said.
In addition, like all devices that run on batteries, EVs are prone to fires. GM announced Friday that it's issuing a recall of 73,000 additional Chevy Bolt EVs due to manufacturing defects that increase fire risk. Tesla has also struggled with reports of its cars catching fire.
But a bigger concern for Tesla's stock price is rising competition from OEM incumbents like BMW, Volkswagen, GM, and Ford, Goldstein said.
Traditional automakers have seen the writing on the wall and are scrambling to convince investors that they can catch up to Tesla. Ford and General Motors announced bold EV plans earlier this year, with the former saying EVs will make up 40% of its sales by 2030 and the latter planning to end gas-powered vehicle sales after 2035.
Tesla's trajectory
Analysts are divided on where Tesla shares, currently trading around $700, are headed next.
Jonas, the Morgan Stanley analyst with a $900 price target on the stock, projects that Tesla will sell 5.6 million cars per year in 2030 but that car sales will make up just 40% of its valuation.
That's because Tesla will be far more than a car company and will generate high-margin revenue from an on-demand mobility service and by selling insurance and other services to car owners, Jonas wrote.
But a litany of daunting risks remains, including competition from legacy automakers and upstart Chinese EV companies like Nio (NIO) and XPeng (XPEV). There's also the lingering possibility of failing to execute the way analysts expect, or if fully self-driving cars and EVs don't catch on, Jonas wrote.
According to Goldstein, Tesla's current valuation is too ambitious. He has a $570 price target, 20% below where shares currently trade, and he has a 3-star rating on the stock because it has a high uncertainty rating — meaning it's difficult to assess how closely Tesla's shares will trade to the analyst's fair value estimate.
Morningstar projects Tesla will hit 5 million EVs sold by 2030, which Goldstein said is half the amount that some bulls project. Tesla's high-profile autopilot crashes won't hurt sales, Goldstein said, adding that he still believes subscription revenue will fall short of the consensus.
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