Analyst: Tesla Will Be Hurt by Oil Prices, High Cost of Model 3

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Morgan Stanley is not saying Tesla Motors isn’t worth an investor’s money. However, the brokerage firm is skeptical about the electric vehicle maker’s ability to penetrate the mass market in the coming decade. In fact, one analyst slashed the sales forecast for the lower-priced Model 3 by nearly 50% in a note to investors, according to numbers reported in Forbes. The heavily revised forecast hinges on fuel prices remaining low and battery packs remaining expensive for the next decade.

Figures: 775,000 Model 3 sales to 400,000?

Morgan Stanley’s Adam Jonas was the latest to weigh in with a skeptic’s take on sales of the mass-market Model 3 that Tesla has planned. According to Forbes, Jonas’s sales forecast for the Model 3 dropped to 400,000 cars by 2028, which is incredible given the 775,000 estimated by Morgan Stanley earlier in 2014. Why the sudden shift? In a word, Jonas doesn’t see Tesla getting the price of a Model 3 battery pack low enough for the car to compete. Coupled with low oil prices (this month), Jonas sees the Model 3 as having considerably less appeal for the decade ahead.

While concerns about Tesla scaling down battery costs have come from experts in the field, Jonas is basing a good deal of his analysis on fuel costs remaining low for the coming decade. That would be quite a prediction, and a reversal of the figures quoted in Morgan Stanley’s outlook for 2014 and 2015. (At the end of 2013, Morgan Stanley had oil prices at $100 per barrel “in 2014 and 2015.” It was below $60 per barrel at the time of writing.)

Projecting the long-term cost of oil is certainly a fool’s errand, but an analyst taking on a product that hasn’t been produced in a factory that has yet to be built might even be more foolish.

Source: Tesla Motors

Oil prices in 2025

It’s safe to say that no Morgan Stanley analyst has a clear beat on U.S. life in 2020, let alone 2028. Data about health problems as related to emissions may force nations around the globe to adopt more electric vehicles and other solutions within the next decade. Meanwhile, Tesla may very well be able to produce its mass-market vehicle at a price that sells in volume.

Since we are several years away from either scenario being a reality, it might be too early to cut sales forecasts in half, or to decide that Tesla has no shot at making the Model 3 affordable. Anyone who follows the daily back and forth of brokerage firms and their investors knows it is unwise to jump to conclusions. Indeed, Jonas considers Tesla “an excellent risk-reward investment” — as long as you don’t expect EVs to catch on in the mainstream.

This time next year, we may be having another discussion about what to do now that gas prices are back above $100 per barrel, but Tesla will be staying the course. It was Wall Street speculation, rather than auto sales, that made Tesla overvalued in the first place. As for the auto industry and global energy policy for the next 13 years, we’ll leave that to the industry innovators and world leaders.