It's yet another day of cranking out high quality sell side research over in the offices of Morgan Stanley, as Adam Jonas' latest "analysis" on Tesla has him asking the apparently completely rhetorical question of: "Do Investors Appreciate the Tesla China Risks?"
Of course, risks of being in China is something we, and other skeptics of the company, have been writing about since before Tesla ever set foot in Shanghai. So, in that regard, it's nice to see Mr. Jonas catch up. But despite his come-to-Jesus moment about overseas risks now that U.S./China tensions are clearly on the rise, Jonas maintained his $1,150 price target on the company and kept Tesla at an "overweight" rating.
In a note to clients out Wednesday, Jonas wrote that "House Speaker Pelosi’s visit to Taipei casts the global battery race into a new light" and that the "race for global EV battery dominance goes hand-in-hand with geopolitics and national security. Tesla is highly exposed to both the risk and the opportunity."
While I write about the risks, I'll keep my price target in tune with the rewards, it appears Jonas thought to himself...
Jonas first laid out the risks, not the least of which is that a majority of Tesla's business relies on things operating smoothly in China:
- Tesla has some of the greatest exposure to the domestic Chinese market of any major automaker. Tesla accounts for over 30% of revenues and, on our estimates, as much as 50% or more of profitability from China.
- Expansion of Berlin and Austin partially dilute the exposure over time. Future connected/autonomous transport entails ‘dual-purpose’ technology that governments will find highly sensitive. Robotics, sensing and computing, software/network/AI – all run on a shared utility-like transport network that resembles the end state of a public utility. We think it will ultimately be regulated as one, dominated by national champions.
- According to Bloomberg, Nancy Pelosi’s trip to Taipei has caused Chinese battery giant CATL(covered by Jack Lu) to delay its N. American plant announcement (a plant to supply Tesla, Ford and other automakers in the US over time). Neither CATL nor Tesla have issued a public comment on this story.
He then mustered up a couple of "opportunities" that could come out of what, to us, appears to be a worsening relationship between the U.S. and China that doesn't show any immediate signs of cessation:
- In a world potentially de-coupled from China EV battery production, the West will need to become more self-sufficient in the provision of EV batteries from up-stream materials to battery manufacturing and IP.
- There-building of an on-shore/near-shore/friend-shore renewable and resilient battery supply chain will require leadership of well-capitalized technology leaders in both the US and Europe.
- We believe Tesla's role in building-out US and W. European renewable energy infrastructure is underappreciated. Pay attention to Tesla's leadership in the Mother of All Capex Cycles (the MACC).
Hardly a bull case, in our opinion, but we digress. Jonas then goes on to call the global disruption a "major investable theme", stating:
Global markets are firmly in the grip of inflation. Inflation is a powerful catalyst for innovation, rivalled by war. The lack of energy supply (both structural and idiosyncratic, renewable and fossil) ranks high amongst global challenges. Re-architecting the global renewable energy infrastructure and supply chain will require as much as 20 to 40 TWh of battery capacity and $10 to $20 trillion of accumulated capex spend through 2040. We believe 2 names exposed to this capex cycle can drive powerful alpha in your portfolio. Old economy, long-out-of-favor heavy industrial names that make stuff, move stuff and dig stuff out of the ground may be poised for a renaissance.
And what would a Jonas note be without reaffirming that Tesla isn't just a car company. He calls Tesla an "on-shore infrastructure powerhouse" before admitting that the company is overvalued as a car company, writing:
Tesla is a renewable energy on-shore infrastructure powerhouse. For those that argue (as many did at a dinner I attended last night) that Tesla is overvalued as an automotive company, there is merit to that argument.
But the company may be substantially undervalued in other ways that deserve exploration. We believe events over the past 6 weeks and catalysts over the next 6 months will materially shift the narrative around what Tesla does, the markets they address, the growth profile and the global/strategic implications of the ecosystem on which they sit atop.