Tesla's set to grow its lead in the electric car race despite its worrying demand slump, Morgan Stanley says

• Tesla has been navigating unprecedented stock drops and a demand slump as the year closes.
• But Elon Musk's automaker remains poised to lead the EV race in 2023, Morgan Stanley said this week.

Tesla is poised to lead in the electric car race in 2023, even as it stares down worrying demand slumps.

"2023 is shaping up to be a 'reset' year for the EV market where the last 2 years of demand exceeding supply will be substantially inverted to supply exceeding demand," Morgan Stanley analyst Adam Jonas said in a note on Wednesday that — and that shift will largely benefit Tesla.

Tesla has certainly been having a complex year, largely overshadowed by CEO Elon Musk's drama with Twitter. The EV-maker is capping off 2022 by doubling down on discounts this month that it normally never gives, on top of watching its used vehicle prices and stock price plummet.

Meanwhile, the automaker's long-held grip on the EV market has been slipping. Its US market share of new EVs stood at 65% through Q3 of this year, according to S&P Global Mobility, down from 71% in 2021 and 79% in 2020. And in 2023, tons of new electric models are set to hit the roads, from established and startup automakers alike.

For months now, both incumbent and startup automakers haven't been able to churn out enough electric cars to meet their early adopters' demands, despite overall adoption remaining relatively low. Many car companies have been sitting on several-thousand-vehicle order backlogs while also getting pummeled by supply chain constraints. But Jonas expects the supply tides to turn.

Even with the increased competition, Tesla may be in a position to extend its lead in 2023, Jonas wrote. And that's before the Inflation Reduction Act benefits kick in, "where Tesla also stands out as the biggest potential winner." (Tesla will requalify for at least half of the $7,500 federal tax credit under the stipulations of the new law, which it had previously been phased out of.)

'Tesla will widen its lead'

The coming months will be especially challenging for the EV space, echoing much of what the industry has seen throughout 2022. Battery supply chain crises, in particular, have dominated boardroom strategy sessions.

"Between a worsening macro backdrop, record high unaffordability, and increasing competition, there are hurdles to overcome," Jonas wrote.

"Yet we do believe that in the face of all these pressures, TSLA will widen its lead in the EV race, as it leverages its cost and scale advantages to further itself from the competition."

All automakers, Tesla included, have struggled to get the cost of their EVs down. The average new electric car sold in the US went for $65,041 in November, per Kelley Blue Book.

The counter-argument

Others aren't as confident in Tesla's future as Morgan Stanley's Jonas.

"The reality is that after a Cinderella story demand environment since 2018 Tesla is facing some serious macro and company specific EV competitive headwinds into 2023 that are starting to emerge both in the US and China," Wedbush Securities analyst Dan Ives wrote in a note this week.

"At the same time that Tesla is cutting prices and inventory is starting to build globally in face of a likely global recession, Musk is viewed as 'asleep at the wheel' from a leadership perspective for Tesla at the time investors need a CEO to navigate this Category 5 storm."