Long-time Tesla Motors (NASDAQ:TSLA) bull Morgan Stanley sparked a tidy stock climb throughout the earlier part of this week with an ambitious note from August 7 that said that Tesla’s forthcoming Model X crossover SUV — which is slated to begin deliveries next year — will outsell the company’s Model S sedan. The firm said that Tesla is “ready to feast” upon an ‘unsuspecting’ premium SUV marketplace, the Los Angeles Times quoted.
Morgan Stanley is so convinced that the Model X will be a better car that will deliver better sales, that it says the production of the SUV could warrant a $320 stock price, about $140 more per share than where they sit now. No one outside of Tesla has actually driven the Model X yet, and the Times says that the firm’s argument is based mainly on “tangible facts.” Tesla has more money and technical resources on hand to support the X than it did the S, the Times quoted Morgan Stanley as describing, and is also investing more time and money into the X launch, and will likely put a car on the road that has fewer bugs to correct than the S did.
By the end of 2016, the Model X may outsell the Model S sedan. Unlike the Model S, the X will come standard with all-wheel drive, ‘falcon’ style doors for parking in close quarters, and similar battery setups to the existing options available for the sedan. It’s also expected to be priced around the same as the Model S, which would put it well at the top of the premium SUV food chain.
For example, the X will be aimed at luring buyers if the Mercedes ML400, which has 329 horsepower and costs about $63,000. Assuming a base price of around $70,000 for the Tesla, and taking into account the alternative fuel credits, that puts the two SUVs on a pretty even keel — and despite Tesla’s tremendous efforts, it’s hard to compete with the panache of Mercedes’ three-pointed star. With Benz, loyalty runs high.
For that price, you could also have a Porsche Macan Turbo. It has 400 horsepower, a $72,000 price tag, and a Porsche badge — a brand with equal or even more intense loyalty than Mercedes. These are the players that Tesla is up against — as well as the likes of the BMW X6, or a Land Rover Range Rover.
For the most part, Morgan Stanley’s note largely feels like an attempt to pump up the stock price of its own holding (the X will “sweep every Car of the Year award on offer by the automotive media,” it said), but that doesn’t necessarily mean that they don’t have a solid point.
There is a demand for electric vehicles, especially for versatile, practical vehicles. The X will be expensive, but there’s certainly a market for vehicles in its class, or there would be cars like the Macan, the Range Rover Sport, or the forthcoming Maserati Levante that’s also expected to drop next year. For a luxury car company, playing in the SUV market is a must. Added to that, Tesla’s X won’t require gasoline, oil changes, transmission jobs, fuel filters or line work, spark plugs, or any other burdensome maintenance concerns that internal combustion engines have.
But ultimately, let’s look at the Model X’s target demographic. The buyer will be rather affluent, and likely a family member with kids. Both parents may work, though one may be an at-home parent as well. The Model X will likely be used mostly for menial errands — dropping kids off, picking them up, grocery runs, etc. This is very good, and is essentially where the X excels — short, around-town jaunts that allow for charging in between. The X isn’t meant to be a long-distance commuter — that’s more the job of the Model S.
Morgan Stanley’s glimmering note did come with its share of caveats and concerns, though. “It is worth noting that the commercial launch had been delayed by 6-9 months,” the firm said, adding that “we are also surprised that Alpha and Beta prototypes have yet to be tested for what is a significantly new product.” The report said it expected Tesla would begin testing “in a matter of days.”
Tesla is right to jump into the crossover segment with a vehicle that is radically different from what is currently available. Bystanders laughed at Porsche as purists cried when it introduced the Cayenne, which has arguably been the best business decision the company has made to date. If it will be the same way for Tesla remains to be seen, but Morgan Stanley — as far as we’re concerned — is right to be optimistic.