Morgan Stanley explains what needs to happen for Tesla stock to outperform again

2024 continues to be a challenging year for Tesla (NASDAQ:TSLA) stock, as its year-to-date losses have now increased to nearly 40%. 

The auto giant led by Elon Musk was already grappling with a myriad of challenges, most notably slowing sales and an escalating pricing war for electric vehicles (EVs). In this context, Morgan Stanley detailed the conditions necessary for TSLA stock to begin outperforming again. 

Tesla stock weakness continues

Tesla stock then received fresh blows this week, after the company announced plans to reduce over 10% of its global workforce, with that figure reaching nearly 20% in certain divisions. 

Not long after reports of layoffs broke, two key Tesla executives, Drew Baglino and Rohan Patel, said they would leave the company. 

This series of negative developments affected already-frail investor sentiment, along with a stock rating downgrade by Deutsche Bank analysts, sent the company’s shares tumbling to the lowest point in more than a year. 

Tesla stock fell below $150 after the brokerage firm downgraded it to Hold from Buy and reduced its 12-month target price from $189 to $123. 

The downward revision came after Reuters reported earlier in the month that Tesla decided to scrap its long-awaited inexpensive electric car that investors hoped could spur growth, while continuing to develop Robotaxis using the same platform. 

“Pushing out Model 2 will create significant earnings and FCF pressure on 2026+ estimates, and make the future of the company tied to Tesla cracking the code on full driverless autonomy, which represents a significant technological, regulatory and operational challenge,” analysts wrote.

What needs to happen for Tesla stock to outperform again

In a Thursday note to clients, analysts at Morgan Stanley said that the EV market is currently in a recession, with stalled market penetration across major regions. 

They attribute this to various factors including affordability, insurability, repairability, depreciation, residual values, infrastructure challenges, reduced incentives, and competition from hybrid vehicles. 

This downturn has also been reflected in Tesla’s recent delivery numbers. In 2023, the EV giant’s deliveries grew by nearly 2023%. In the Q1 2024 alone, they fell 10% year-over-year. 

At the margin, it looks like Tesla is exiting the traditional EV auto industry, Morgan Stanley analysts noted. 

“This doesn’t mean that Tesla won’t keep selling cars (including new launches) for many years to come. But this cannot be the end game,” they wrote. 

“In the meantime, a variety of forces have driven a ‘marginal exit’ from the autos industry with Tesla’s 50% targeted sales CAGR clearly no longer valid. We currently forecast just under a 20% unit CAGR through FY30. Such a growth rate used to seem too low. Is it too high?” asked the analysts.

For Tesla stock to start outperforming again, consensus earnings expectations need to stabilize, Morgan Stanley’s team stressed.

Their current estimate for non-GAAP FY24 earnings per share (EPS) is $1.12, significantly below the consensus of $2.67. 

They clarify that their forecast has not been overly conservative or "kitchen-sinked" despite the volatile operational period for the company. The $1.12 EPS forecast is seen as having an equal likelihood of being adjusted upwards or downwards.

“Having said that, we do find that, based on our discussions, investor expectations for Tesla EPS is closer to our number than sell-side consensus,” they said.