Morgan Stanley says the development of a new type of battery will spur growth in electric vehicles and names two stocks it thinks will benefit from the new technology. The bank has previously described batteries as the "new oil," and said in a note on Jan. 2 that their application to the EV market will offer significant investment opportunities. Morgan Stanley analysts, led by Jack Lu, put the total addressable market — or potential revenue — of EVs at $535 billion. This will require further battery technology development, however, according to Lu. Specifically, he noted that battery costs will have to be lower for EV penetration to exceed 50%, particularly as subsidies and tax credits are phased out. A "better and cheaper battery" is thus needed, Lu said. Morgan Stanley said the 4680 (46 millimeters wide and 80 millimeters tall) cylindrical cell battery, currently solely developed by Panasonic for EV behemoth Tesla , is likely to be the next battery iteration. It expects 4680 penetration to reach approximately 50% of the global EV battery market by 2025 and 60% by 2027-2028. Panasonic The bank described the Japanese battery manufacturer as "the leading company in the era of 4680 battery cells" and highlighted the company's commitment to the automotive rechargeable battery business as a key growth area. The bank is overweight on the stock, for which it has a price target of 1,900 Japanese yen ($16.40). The stock closed at 1,320 Japanese yen on Jan. 4 — an implied upside of 44%. Eve Energy Morgan Stanley also likes China's leading EV battery manufacturer Eve Energy as a beneficiary of the transition to the 4680 battery. The bank has initiated coverage on the company with an overweight rating. The bank noted that the company is "one of the few" potential suppliers of the 4680 batteries globally, with production expected to commence in 2023. The company's order outlook is also "highly visible," Lu noted. Eve counts electric car startup Xpeng as its major customer in China. It currently supplies 20% of batteries used in Xpeng's EVs, which Morgan Stanley expects to double this year. The company is also likely to add more EV makers to its customer base as capacity expands, according to the bank. Current customers outside of China include BMW , Daimler , Kia and Hyundai . Morgan Stanley expects the company's battery earnings to grow 60% into 2025. The company is also expected to grow its share of the global EV battery market to approximately 9% in 2025 from its current share of less than 4%. The bank has ascribed a price target of 149 Chinese yuan ($23.50) on Eve, which closed at around 112 Chinese yuan on Jan. 4, representing a potential upside of 33%.
This photo shows an electric car being charged on a street in London.
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Morgan Stanley says the development of a new type of battery will spur growth in electric vehicles and names two stocks it thinks will benefit from the new technology.