Adam Jonas Of Morgan Stanley: Tesla [TSLA] Is A Must Own. But What About Legacy Auto?

Image: Screenshot of Bloomberg.com video.

This article is on some interesting things that Adam Jonas has said recently on Tesla and legacy auto. We have written a lot about Adam Jonas over the years. I remember him for his infamous $10 Tesla price target if everything goes wrong for Tesla. He certainly was wrong about that one, or was he? As Zach said in that article, Morgan Stanley was warning potential investors that Tesla could go up a lot or down a lot. Warning investors that a Tesla stock is high risk and high reward is his job as a Wall Street auto analyst. Zach’s point is that what would be more valuable is knowing whether Tesla is going to go up or down. That is a much tougher question and was possibly beyond Adam’s and my abilities. But that doesn’t mean that Adam doesn’t say some interesting things that warrant discussion. Click the picture above if you want to watch the 8-minute video of his latest interview, or just read my summary below.

Summary of Video

1. Tesla is a must-own for auto investors
2. Many of his clients get that electric vehicles are a growth area for the market, but many investors don’t want to own Tesla.  He said many investors say, “They will never own Tesla.” He didn’t get into why his investors say that, but it isn’t hard to figure out why. As we have covered extensively, many people have said bad things about Tesla. We call that Tesla Fear Uncertainty and Doubt (FUD). We don’t know if those things people say are because they just don’t understand Tesla or they are paid by Tesla’s enemies to hold its stock price down in hopes of making it difficult for the company to raise money when it needs it or they just don’t like Elon Musk and Tesla for other reasons. At this point, it appears the Tesla bears’ efforts to hold down Tesla’s stock price have failed (temporarily?), because the stock has gone up a great deal and now is a mainstream holding.
3. Tesla has a couple of big advantages. It can attract capital and talent with its success and high stock price. It also doesn’t have to manage the decline of its gas and diesel cars, since it doesn’t make any and never has. Legacy companies all say they are going to do the same thing as Tesla, but they don’t have Tesla’s advantages.
4. “You run the risk of not owning a company that makes the stuff you do own obsolete.” They recommend other EV companies, but you need to own Tesla as a hedge as they ramp up their auto and energy businesses around the world. Not just in the US, but internationally, governments are investing big amounts of money in infrastructure. The electric cars, charging stations, solar panels, and battery storage that are at the core of Tesla’s plans are some of the favorite projects for many countries’ incentive programs.
5. The host asks if you get more “bang for your buck” with the legacy auto manufacturers that trade at much lower multiples than Tesla. Adam thinks Volkswagen and other companies’ EV assets may be “very, very undervalued,” but 98% of their revenue that comes from their existing gas and diesel assets may in fact be net liabilities. In other words, the worth of those assets might be “massively negative.” He compares those toxic assets to tobacco and asbestos, two industries that have faced massive litigation over the last few decades. Will the auto companies be next?
6.  The host stated that it isn’t like everyone is buying an “EV tomorrow.” Adam agreed, and his assumption is the transition will take decades, but investors want to be ahead of the curve.
7. Tesla is an installed base play as it goes from having a million customers to 30 million customers that they get recurring revenue from, more like Apple or Netflix. If Tesla executes its plan, Morgan Stanley will cover the company with one of its tech analysts instead of with Adam, who is one of their auto analysts.
8. Volkswagen is a German national champion and will have some level of success, but Tesla’s real long-term competition is the big tech software companies like Apple and Google that could use their leverage and their existing strong market positions in the mobile and search markets to capture revenue opportunities that aren’t available to Tesla.
9. The other concern is that countries like China or regions like the EU could erect national security walls that favor companies they can control and that might be to Tesla’s disadvantage as a US-based company.
10.  The host’s question is: do rising interest rates hurt Tesla? Adam said, “of course, you got me.” It hurts almost all companies.

My Experience At A Legacy Company Transitioning To New Technologies

I worked at IBM from 1984 to 1998. At the beginning of my employment, it was the dominant technology company in the world, with more revenue and profits than all of its major competitors combined. But in the 1980s and 1990s, the hardware became less profitable and both consumers and businesses started to move to smaller computers from mainframes. More of the industry’s profit moved to software and later to the internet and the cloud. I was part of one large project with thousands of people to develop business software to meet IBM’s needs, and then to also sell that software to IBM’s customers. We planned to develop and sell 30 modules of this software to thousands of large companies.

I was lucky enough to be part of the only part of this software that was released, and it was moderately successful. Why was this huge project such a failure? I’m sure there were many reasons, but two that were obvious to me were talent and requirements. The company staffed the development of this massive software project not with its top software talent, but primarily with thousands of retrained manufacturing workers. There is nothing wrong with retraining manufacturing workers to become software engineers, but putting thousands of them on a single project as their first real-world experience was a big mistake. I’ve developed commercial software and I’ve developed software for internal customers, and the bar is significantly higher in commercial software, which is somewhat of a “winner take all” game.

Image Credit: Tesla

How does this apply to Tesla and the auto industry? It shows that it is very difficult for a leader in a market to maintain that leadership (even if they have what everyone thinks is outstanding management) as its industry goes through a major technology change. If the auto industry only goes from gas cars to electric cars, I think many of the companies will be able to survive, but if the industry also transitions to being about autonomous driving more than about producing and selling cars to individuals, the transition becomes much more difficult for all existing automakers (including Tesla if it doesn’t win the race).

Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], and Xpeng [XPEV]. But I offer no investment advice of any sort at any time or anywhere.