Tesla stock could soar 50% and is the top pick in an auto sector that's seeing an EV 'shake-out,' Morgan Stanley's Adam Jonas says

• Tesla stock could add 50% despite price cuts to vehicles, according to Morgan Stanley.
• Analyst Adam Jonas cited Tesla's strong balance sheet and profitability.

Tesla stock could gain 50% on a strong balance sheet and a head-start against the competition in the EV market, according to Morgan Stanley.

In a Wednesday note, analyst Adam Jonas named Tesla his top pick in the auto sector, replacing FREYR Battery, as price cuts ranging from 6% to 20% will squeeze rivals.

"Tesla's recent price cuts are just the latest sign the EV market may be entering the 'shake-out' phase," he wrote.

Jonas added that the EV market is shifting to an era of under-supply to potential over-supply, marked by shorter delivery times, price cuts, and falling used-car values.

While Morgan Stanley cut its 12-month price target for Tesla stock to $220 from $250 due to price cuts, it reiterated an overweight rating. Shares ticked up 0.8% to $145 ahead of its fourth-quarter report after the close.

"[Tesla] still offers approximately 50% upside at materially lower execution and dilution risk vs peers," the note said.

Shares of Tesla have gained nearly 19% so far this year, after a brutal rout in 2022 saw the stock decline 65%.

And competitors like Rivian and Lucid have seemingly yielded the lead in pricing strategy tactics to Tesla, as Elon Musk's latest bout of price cuts will force the broader landscape to follow suit or risk losing market share.

"Other than Tesla, no other EV name under our coverage has proven to make a profit on their EVs and some
(RIVN, LCID) have a BOM (Bill of Materials) cost still well in excess of their average selling prices," the note said. "Everybody will need to cut price, but we don't think everybody will be able to cut costs and fund the business without significant capital raises."

While Morgan Stanley trimmed its price target on Tesla stock, its $220 level remains one of the highest on Wall Street.

JPMorgan rates Tesla "underweight" with a $120 price target, and Wedbush rates Tesla "outperform" with a $175 price target.

"In a world of deflationary EV pricing, we believe Tesla can leverage their industry leading margins, and manufacturing scale to grow the market and 'tax' the competition," Jonas wrote.