- The Morgan Stanley auto analyst Adam Jonas argued that Tesla is “fundamentally overvalued” but “strategically undervalued.”
- That’s a typically Jonas insight, in that it seeks to reconcile a contradiction.
- It’s true: Tesla is vulnerable short-term, but valuable long-term if a significant electric-vehicle market emerges.
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Last week, in a research note assessing the connections between the car and technology industries, Morgan Stanley’s lead auto analyst, Adam Jonas, argued that Tesla is “fundamentally overvalued” but “strategically undervalued.”
For Jonas, a longtime Tesla bull who has more recently been trimming back his expectations, it was an interesting angle (in fairness, Jonas has never been a Tesla mega-bull — he’s consistently tempered his enthusiasm for the stock and the company with his fairly deep understanding of how carmakers operate).
So what does he mean, exactly?
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It’s not actually all that complicated. He thinks Tesla investors have bid the company’s value up too high, given that it’s not clear whether Tesla has ongoing sustainable demand for its vehicles. This is prudent, as the electric-vehicle market remains tiny, but it’s worth pointing out that even as the US auto market has plateaued for annual sales, Tesla has been posting triple-digit quarterly percentage gains year over year.
A strategic pivot toward electrification
Meanwhile, it appears that the entire auto industry is making a healthy pivot toward electrification, driven largely by the need to balance booming sales of pickup trucks and SUVs with looming government requirements for higher fuel economy and lower emissions. The latter is determined by automakers’ entire fleets, so electric vehicles are good way to achieve compliance, since they produce no tailpipe emissions and burn no gas.
The global transportation market is worth trillions, so there are compelling reasons for investors to study the opportunity and work to position themselves for maximum future gains. Right now, the electric-vehicle output of most big carmakers is exceptionally modest. So Tesla, with its 100% all-electric fleet, presents itself as the best short-term way to put money behind EV growth.
Quite simply, Tesla shares are a bet on a bigger EV market in a decade or two. Tesla might not even be around then, but if investors want to play the future, CEO Elon Musk’s carmaker is the only game in town.
That’s what Jonas means by “strategically undervalued.” Tesla effectively holds a monopoly on premium all-electric cars, and that means its shares should be worth much, much more — assuming they’re a claim on future earnings and cash flow. Undergirding his case is something obvious: Since its 2010 IPO, Tesla stock has returned close to 800%, and at times has returned more than 1,000%.
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Tesla has already been spectacularly undervalued as a strategic investment
By that analysis, Tesla has been strategically spectacular — so drastically undervalued historically that early investors have beaten the S&P by 600% or more, depending on when they bought in an whether they sold shares when Tesla has peaked.
Jonas’ seemingly contradictory take, then, is spot-on, but it’s also an example of what F. Scott Fitzgerald meant when he wrote in 1936 that “the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
Stated another way, Tesla is short-term terrible but long-term stupendous. And not explicitly for reasons that short-term investors might support. The transportation market of tomorrow, ideally then, looks structurally similar to the transportation market of today, with many different companies competing for customers. We aren’t there yet, but if you think there’s money to be made on an electric future, then Tesla is the best way to attack that opportunity right now.
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