China Remains Major Challenge for Tesla (TSLA) Stock; Morgan Stanley Weighs In


Earlier this month, shipments of Tesla (TSLA) Model 3s were delayed heading into China after misprinted labels were tagged on vehicles. While Tesla says the issue was resolved with Chinese authorities and there won’t be any impact on sales in the country, the mix-up brings fresh attention to Tesla’s performance in the world’s largest auto market. The company faces a steep challenge in China and is in unchartered territory compared to other companies — while Tesla it imports all its vehicles into the country, rival automakers partner with local manufacturing companies instead.

Given the difficulties, Morgan Stanley analyst Adam Jonas is “cautious” on Tesla in China, maintaining his Equal-weight rating on the stock with $283 price target, which implies nearly 4% downside from current levels. (To watch Jonas’ track record, click here)

Jonas doesn’t make too much out of the mislabeled shipments but says “it highlights the risks inherent in US auto/tech firms conducting business in [China] in high value imported products or technological areas that may become sensitive along the grounds of data privacy, cybersecurity, robotics,and AI.” As a result, the analyst remains “cautious on the role of China in Tesla’s long term commercial strategy and fundamental value,” though sees some light should Tesla “accelerate construction of its physical capacity in the Shanghai region this year.”

Jonas points to Tesla’s annual report, which highlights “local [Chinese] manufacturing” as “critical to our expansion and sales in China.” The electric car giant also believes its Model S and Model X in China have been negatively impacted by certain tariffs on automobiles manufactured in the U.S., such as our vehicles, and our costs for producing our vehicles in the U.S. have also been affected by import duties on certain components sourced from China.

Tesla in China isn’t the only factor weighing on the stock. Earlier this month, the company announced it would close the doors of all of its retail and showrooms, in an effort to cut expenses and contribute to profitability while maintaining current prices. But just this week, the company backtracked on its plans, and will instead keep stores open and raise prices. As Tesla gave the public a peek into how closing its stores is necessary to improve its bottom line, it remains to be seen how Wall Street reacts in the long-term to Tesla’s stock, should profitability remain a challenge.

Overall, the investment community is split on Tesla. TipRanks analysis of 25 analyst ratings shows a consensus Hold rating, with nine analysts Buying, seven analysts recommending Hold and nine Selling. The average price target among these analysts stands at $315.04, suggesting analysts, as a group, see 9% rise from TSLA’s current trading price. (See TSLA’s price targets and analyst ratings on TipRanks