Morgan Stanley, $MS, has named Tesla, $TSLA, as its new top pick in the U.S. auto sector, replacing Ford, $F

Morgan Stanley, $MS, has named Tesla, $TSLA, as its new top pick in the U.S. auto sector, replacing Ford, $F.

Tesla (TSLA.O) shares surged nearly 6.3% on Monday after Morgan Stanley designated it as the "top pick" in the U.S. automotive sector, replacing Ford (F.N). The brokerage suggested that Tesla's energy division could eventually surpass the value of its automotive business, as investors increasingly focus on companies addressing climate change.

Morgan Stanley also projected that Tesla would dominate the market for zero-emission vehicle credit revenue, having recognized approximately $2,000 per unit in the second quarter. The firm predicted that Tesla might account for up to half of the credit sales in the market, bolstering a highly profitable segment that might not yet be fully appreciated by investors.

Despite this optimism, Tesla recently reported its lowest profit margin in over five years and missed Wall Street's earnings expectations for the second quarter. The decline was attributed to significant vehicle discounts aimed at boosting flagging demand.

The brokerage also highlighted concerns regarding Tesla's ability to commercialize autonomous driving technology in China and uncertainties about the future demand for electric vehicles. Tesla's autonomous driving technology has faced regulatory scrutiny due to safety issues. Investors are particularly eager for the company's robotaxi launch event, which has been postponed from August to October to address certain aspects of the vehicle.

Meanwhile, Ford's shares dropped nearly 2% on Monday, following a 20% decline last week after the company reported lower-than-expected second-quarter profits. Ford has been grappling with quality-related expenses and stiff competition in its electric vehicle segment.