Morgan Stanley boosts Tesla bull case to 65% upside but still has an 'underweight' rating on the automaker's shares

• Morgan Stanley on Wednesday boosted its Tesla stock price target to $1,050 from $740. It also updated its "bull case scenario" to $2,500 from $2,070.
• The bull case is a more than a 65% increase from where shares of Tesla traded on Wednesday.
• Still, the firm has an "underweight" rating on the automaker's shares, as a "host of near-term risks" to the upside remain, the analyst Adam Jonas said in a note.
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Morgan Stanley on Wednesday boosted its Tesla "bull case scenario" to $2,500, implying a more than 65% surge from where shares were trading.

Still, the firm has an "underweight" rating on the automaker's shares, as a "host of near-term risks" to the upside remain, the analyst Adam Jonas said in a note.

The bump in Morgan Stanley's Tesla price targets was driven by analysts increasing their units forecast to 3 million by 2030 from 2.3 million. Morgan Stanley said its bull case was possible if Tesla adds even more volume to its auto business and over $100 billion in value to Tesla mobility, connected services, and battery supply.

"It's becoming increasingly obvious that Tesla is going to become a very large company, approaching (if not exceeding) Toyota or VW revenues in the next decade and leaving the world's largest luxury OEMs behind," Jonas wrote. "For the first time in our 10 years of coverage we're starting to model this company as a very, very large auto maker."

The boosted price target — the second in recent weeks from Morgan Stanley — came after Tesla's blockbuster second-quarter earnings report. The company reported its fourth consecutive quarterly profit, exceeding Wall Street's expectations and paving the way for inclusion in the S&P 500 index.

The note said Tesla shares were discounting roughly 5 million units and implied 10% of industry revenue and 20% to 30% of industry profit.

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Morgan Stanley's new forecasts give Tesla "credit for continuing to attract the world's best talent at the industry's lowest-priced cost of capital," Jonas said. The firm said that it expected Tesla to continue to grow rapidly and that the launch of the automaker's Semi could open doors for an important new market.

Still, there are risks to the bull case ahead, Jonas said, including Tesla depending too much on China, underestimating competition from other players, and overestimating the "autonomous opportunity."

As Tesla continues its searing rally, Jonas said he sees lofty investor expectations as a burden "skewed to disappoint."

Shares of Tesla are up roughly 265% year-to-date.