Can Tesla Stock Rise to $500 with China’s Help?

  • Tesla stock is up today amid reports that China will grant a subsidy to some of its vehicles. Earlier this year, China exempted Tesla cars from its purchase tax despite the escalation in the US-China trade war.
  • Yesterday, Morgan Stanley raised TSLA’s bull case price target to $500, nearly a 50% potential upside over its current price. Among other factors, the brokerage sees higher incremental sales in China contributing to the stock’s rise.
  • Could a subsidy in China now lift Tesla stock?

Tesla stock

Tesla stock has been on an uptrend for the last couple of months. It was trading with massive year-to-date losses until September. However, it rose sharply in October and continued its run in November. The stock is also in the green this month. Yesterday in Can Tesla Stock See a Santa Claus Rally This Year? I noted that the possibility of a year-end rally is pretty dim considering the stock’s recent uptrend.

Meanwhile, Morgan Stanley, which is otherwise neutral on TSLA, raised its bull case scenario target price to $500—almost a 50% upside from its current level. It attributed its bullishness to the Cybertruck and expectations of higher sales in China.

Tesla in China

There’s little denying that China is crucial for Tesla’s plans. The country is the largest electric vehicle market. Furthermore, the Chinese government is doubling down on its vehicle electrification plans. Read How China’s Aggressive EV Push Could Benefit Tesla for more insight. Unlike the US, where changes in the White House affect policies, China is firm on its support for electric vehicles. Higher vehicle electrification helps China to cut down on pollution and oil imports. For Tesla, China is the largest market outside the US.

TSLA’s China Gigafactory

Tesla and Elon Musk recognize China’s importance. The company’s first overseas factory was recently built in China. Despite US-China trade tensions, China exempted some Tesla models from its purchase tax. Interestingly, the country announced the measure in August, when the US-China trade war saw a major escalation.

China’s move to grant a subsidy to some Tesla cars is a positive development, but we need to keep a couple of things in mind. Firstly, earlier this year, China lowered the subsidies for electric vehicles. Since then, the country’s electric car sales have fallen sharply.

US federal tax credit

Secondly, in the US, Tesla’s biggest market, its cars won’t receive any federal tax credit starting next year. This development could hurt its US sales in at least the first half of 2020. Competition is also heating up in the electric vehicle space, with automakers such as Ford (F) launching new electric versions of even their best-selling models. In China too, automakers have rolled out big plans for their electric vehicle launches.

Let’s circle back to Tesla’s $500 price target. While the subsidy in China will help, a lot will need to happen operationally for the stock to break out to higher levels. Such performance would require strong production numbers from its US and China factories next year. The company will also need to show some sort of sustainable profit for its stock to climb above $500. While Tesla fans might not care much about profitability, the markets do! In fact, the company’s surprise third-quarter profit was the key driver of the recent rally in its stock. Read Tesla Stock Short Sellers Are Hit after TSLA Makes Profit for more analysis.