Tesla (TSLA) investors have been betting that CEO Elon Musk's entry into the massive China market is the next big catalyst (sorry robotaxis), but recent geopolitical shifts have cast a pall on that.
Shares of the Palo Alto-headquartered electric automaker have bumped upwards from a leaked email suggesting stronger demand than expected. For long term demand to grow into Tesla's valuation, long term demand in China will be pivotal.
So far, this appears constructive, as Morgan Stanley analyst Adam Jonas noted that the company is expanding its market share for Model 3 and Y vehicles in the region.
"We believe the 2019 airpocket in Model 3 demand may largely continue until an affordable, locally produced Model 3 is available in that market," he wrote in a note to clients.
The increase in market share there could be a serious bonus to Tesla, as electric car sales in China jumped nearly 62% in 2018 and look poised to continue growth in coming years.
Infographic: China EV Monthly Sales - https://t.co/ZTRGBjTgNO— Kevin Curran (@KevinCurranRM) May 23, 2019
Tesla is certainly working toward that aim with its recent factory opening in Shanghai.
"We are constructing Gigafactory Shanghai in order to increase the affordability of Model 3 for customers in China by reducing transportation and manufacturing costs and eliminating certain tariffs on vehicles imported from the U.S." the company said in its most recent quarterly filing. "We broke ground in January 2019, and subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online, we expect to begin production of certain trims of Model 3 at Gigafactory Shanghai by the end of 2019."
However, the production of large numbers of vehicles is still being pushed out into 2020 by many analysts, with many voicing concern about how recent trade restrictions and political posturing might impact the company's standing.
"We continue to have concerns on the long-term viability of a US player in the Chinese EV market," Jonas said. "As such, while we give Tesla credit for tapping into the world's largest EV market for a number of years, we would not pay a particularly high multiple for earnings derived from this region as we strongly suspect a host of national champions to emerge. Moreover, we believe investors must consider global trade and geopolitical risks as Tesla's dependency on China increases."
Considering China and the U.S. have found high tech industries such as semiconductors and smartphones to be a key point for restrictions, the operations of a technology focused U.S. company like Tesla could certainly be curbed amidst the trade war.
"The reduction in our bear case to $10 is driven primarily by our concerns around Chinese demand for Tesla product," Jonas warned in his worst case scenario. "Our revised bear case assumes Tesla misses our current Chinese volume forecast by roughly half to account for the highly volatile trade situation in the region, particularly around areas of technology, which we believe run a high and increasing risk of government/regulatory attention."
The lack of demand in the region could foment downside momentum as fears of softening demand come into quarterly earnings print and embolden short-sellers.
As many see the recent capital raise as a bridge to the burgeoning Chinese market, it will be important to hang onto the growth in China as a long term opportunity.
If that evaporates due to factors out of Musk's control, the value that is being priced in on the possibility of massive sales in the world's most populous market goes away with it.
There are many question marks surrounding Tesla stock but this could be one of the most pressing for investors.