Tesla will behave like a Chinese tech stock for the next decade, according to Morgan Stanley.
Up to half of the Elon Musk-run EV maker’s profitability comes from China sales, the bank said.
Tesla and Chinese tech stocks have both fallen sharply this year as recession fears intensify.
Tesla rakes in so much of its profits from Chinese sales that it will behave like a tech stock listed on Hong Kong’s Hang Seng or the Shanghai Composite index until at least 2030, according to Morgan Stanley.
The electric carmaker is likely to find itself closely tethered to the price movements of China’s tech stocks because up to half of its profits come from that country, its analysts said in a Monday research note.
“We estimate Tesla generates as much as one-half of its profitability from the Chinese market, arguably making the stock a derivative of a Chinese tech stock,” the team led by equity analyst Adam Jonas said.
Beijing’s zero-COVID policy of lockdowns and a crisis in the country’s property market have dragged on the Chinese economy this year. This week’s reading of third-quarter GDP growth of 3.9% year-on-year puts the economy on track to fall well below the Communist Party’s 5.5% target for the year.
On Monday, Tesla slashed the price of its Model 3 and Model Y electric vehicles by 9% in China, as businesses start fretting about a potential recession.
That could weigh further on the EV maker’s stock price, which jumped 2.7% to $216.95 shortly after the opening bell Tuesday, but has fallen over 20% in the past month. Jonas dropped his Tesla price target from $350 to $330 a share, which he said reflected “modest changes” to Morgan Stanley’s earnings-based model.
“Price cuts announced by Tesla China may affect already-weak market sentiment,” Morgan Stanley said.
Investors’ fears about economic slowing have been weighing on Chinese tech stocks, and the sector-tracking KraneShares CSI China Internet ETF has plummeted 48% this year so far.
Tesla CEO Elon Musk pointed to an economic slowdown in China on the company’s earnings call.
“China is experiencing a recession of sorts,” he said.
Tesla’s reliance on sales to China makes it vulnerable to a rise in geopolitical tensions between Beijing and Washington, Morgan Stanley said.
A cooling in relations between the US and China has weighed on exposed assets this year. Chinese semiconductor stocks fell sharply earlier in October, after the Biden administration introduced export controls. These limit the sale of chips made with US technology to sellers who have been given a verified export license.
Meanwhile, Musk was praised by Chinese government officials for suggesting that Taiwan — a flashpoint in tensions with the US — should become a special administrative zone like Hong Kong.
Tesla will likely be reliant on its sales in China until at least 2030, the Morgan Stanley team said. That leaves it exposed, if the hostilities between the US and China intensify.
“The broader arc of Sino-US economic relations and the evolving geopolitical situation will continue to add volatility to Tesla shares,” the bank said.
“Our forecasts through 2030 become gradually less China-dependent, but this takes time.”
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