Tesla: Will it be America’s fourth automaker?

Tesla has the potential to take electric vehicles mass market and produce 500,000 units in 2025, a year when electric vehicles will represent more than 15 percent of all cars, according to a Morgan Stanley report.

Morgan Stanley analyst Adam Jonas made the case for Tesla in a long report on the electric vehicle market. Jonas gave Tesla a $70 price target even though the company’s stock price was $23.71 on March 30.

Jonas set up his case for Tesla being the fourth U.S. automaker like this:

The confluence of structural industry change, disruptive technology, changing consumer tastes and heightened national security creates an opportunity for significant new entrants in the global auto industry. California dreaming? We don’t think so. In our view, the conditions are ripe for a shake-up of a complacent, century-old industry heavily invested in the status quo of internal combustion. The risks are high. So is the opportunity. Enter Tesla.

Morgan Stanley report should be taken with a grain of salt—the investment firm was an underwriter for Tesla’s IPO—but it is notable for its projections of the electric vehicle (EV) market.

Some key themes from the report:

• Electric vehicles will be the minority of auto sales in the short and medium term, but then become the majority.
• EVs will have a 5.5 percent market penetration globally in 2020 and 15 percent by 2025.
• The internal combustion engine will still dominate with 85 percent of the market, but EVs will move from rich man’s toy to mass market.
• High oil prices will make EVs more popular and in 30 years EVs will be the bulk of the market.
• In this market, Tesla is expected to hit the mainstream with EVs in the $30,000 range. The Model S sedan is a start toward those less expensive cars.

If all goes well, Tesla can generate $1.2 billion in operating profit and revenue of $9.5 billion in 2025, argues Jonas. Tesla could capture 3.6 percent of the EV market globally. There are significant questions about Tesla. Among them:

• Can Tesla stay independent and grow?
• Can the company execute to the point where it’s not a niche player?
• Is there room for another automaker?
• Will Tesla have enough money? Tesla could face a liquidity squeeze as it builds the Model S. The lack of capital could make Jonas’ decade long projections for Tesla pure fiction.

Jonas argues that Tesla is an automaker more than a clean-tech play. Large automakers are going to be hampered by regulatory requirements for gas engines. As a result, Tesla can be nimble and grow. Meanwhile, there’s no legacy business—like the internal combustion engine—for Tesla to protect. Jonas wrote in a research report:

The key difference between our investment view on Tesla vs. that of the prevailing market is that we believe Tesla has a viable opportunity to be a significant volume player in the global auto industry. The transformation from California startup to global auto player may require well more than a decade to achieve - not unlike the genesis of many of today’s established automotive companies.

One big wild-card here—aside from Tesla’s liquidity—is battery technology. Jonas’ forecast for the EV market revolves around a fast charging battery that has a 200 to 300 range. That battery, which isn’t available today, would make EVs competitive with gas engines.

More:

• Tesla’s Model S electric sedan on track; Crossover planned
• Tesla’s Model S will go 300 miles and cost $77,400
• Tesla: Model S alpha due end of 2010, launch on track for 2012
• Electric cars bring manufacturing back to California
• esla, Toyota plot electric RAV4 for 2012