DETROIT Shares in electric automaker Tesla Motors Corp on Thursday surged as much as 21 percent after Morgan Stanley upgraded the stock, saying the market for electric vehicles is underestimated.
Morgan Stanley upgraded Tesla to "overweight" with a price target that is more than twice the company's current share price, saying conditions in the auto industry are ripe for new entrants, and Tesla can be a significant volume player.
Shares of the company were up 20 percent on Thursday morning at $28.51. The brokerage set a price target of $70 on Tesla's stock.
"The Morgan Stanley upgrade was certainly a catalyst for moving the shares along with the unprecedented price target increase of nearly 150 percent, based on the stock price of $28.35," said Patrick Mortimer, director of option trading at Pipeline Trading Systems, a stock and option block execution firm in New Hope, Pennsylvania.
He also cited President Barack Obama's Wednesday speech about reducing the country's dependency on foreign oil as a catalyst. Obama proposed cutting U.S. oil imports by a third over 10 years.
"Tesla Motors would benefit greatly from any shift away from internal combustion engines," Mortimer said.
Morgan Stanley said the electric vehicles market is underestimated at a time when rising oil prices accelerate the shift from the internal combustion engines.
Morgan Stanley was an underwriter last summer for Tesla's initial public stock offering, when shares rose more than 40 percent on the first day of trading.
The shift away from the internal combustion engine has made room for entirely new players, and has given Tesla the opportunity to establish itself as America's fourth automaker, but the biggest risk remains Tesla's own execution of its plan, the brokerage said.
The brokerage believes Tesla will be a significant player with a high chance of success, in contrast to the prevailing market view that Tesla will be a niche player in a fringe electric vehicles market with a high chance of failure.
It estimates electric cars sales to reach 7 percent of total car sales in the U.S. market and 5.5 percent of global sales by 2020.
However, the brokerage added that even on its forecasts, the internal combustion engine remains by far the dominant form of propulsion for a very long time.
Shares rose as high as 21 percent to $28.71 and were still up $4.57, or 19.3 percent, at $28.28 in afternoon trading on the Nasdaq.
Tesla options volume was heavy and bent on the call side. Option turnover was 8.3 times the typical levels with about 19,000 calls and 6,053 puts traded by midday, according to options analytics firm Trade Alert.
"We have primarily call buyers in the April and May $28 and $29 strikes. The June $30 strike call has attracted two-way traffic with both buyers and sellers," said TD Ameritrade chief derivatives strategist Joe Kinahan.
Option speculators are playing the short term looking for a continued near-term pop in the stock, he said. There are also investors selling calls against existing share positions in Tesla and appear to be trading in the June $30 contract.
(Reporting by Ben Klayman in Detroit, Jennifer Robin Raj in Bangalore and Doris Frankel in Chicago; editing by Gunna Dickson)