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Will Elon Musk’s Tesla Keep the Party Going in China?

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Elon Musk danced yesterday at Tesla’s (NASDAQ:TSLA) Model 3 event in China. The surge in Tesla’s stock price in recent months has set the stage for such celebration. Ugly or not, Tesla’s Cybertruck crossed 250,000 preorders in a week. Ugly or not, Musk’s dance was the talk of the town.

Tesla stock, which hit a 52-week low of $178.97 in June 2019, ended the year over 25% higher. The surge has continued in 2020 so far, with the stock rising by over 17% since the turn of the decade. Even Wall Street analysts are cozying up to TSLA with revised price targets. The company’s China foray is at the heart of the surge and the changing winds on Wall Street.

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Tesla is cruising in China

The US-China trade war created a lot of headlines in 2019. Tesla’s Gigafactory 3 near Shanghai was also the talk of the town in the year. Tesla did the groundbreaking for the facility on January 7, 2019, and completed the work by August. It started producing in October, made deliveries of the first 15 China-made Model 3s, and hit the production milestone of 1,000 cars per week before the end of 2019. The Gigafactory 3 is expected to start producing 3,000 cars per week soon.

Coming to China sales, Tesla is trumping its competition. Tesla saw its deliveries in China surge by 14x in November 2019. The company delivered 5,597 vehicles during the month, according to China Automotive Information Net. In November 2018, Tesla delivered 393 vehicles in China. Tesla’s performance in China is especially spectacular given the slump in China’s EV (electric vehicle) market. In November, new energy vehicle sales in China fell by more than 43%.

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The Model Y is coming soon!

Tesla is also betting big on its Model Y. Musk feels that the Model Y could surpass the combined sales of all the company’s other models. Globally, SUV and truck sales are outperforming the sales of cars. In 2019, car sales fell 10.1% in the US, while the sales of trucks and SUVs saw a 2.6% rise. Tesla saw a 42% jump in US deliveries during the year. In China too, Sedan sales saw an 11.7% decline in the first 11 months of 2019, while the SUV sales decline was limited to 7.1%.

The Model Y could be a game changer in China. Tesla’s Gigafactory 3 near Shanghai is scheduled to produce the Model Y next. If Tesla can get production up in time and manage to ward off the competition, some bears may change sides. Wedbush analyst Dan Ives said, “In a nutshell, we believe China remains the major swing factor in the stock and ultimately is worth between $75 to $100 per share to Tesla’s valuation with Giga 3 the linchpin.”

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Tesla should watch out for competition in China

Tesla has been the front-runner in the EV race. In the US, it commands over a 70% market share. In China, it’s seen a surge in deliveries, and this growth may accelerate with the Gigafactory 3.

However, the competition is also rising. Local competitor NIO (NYSE:NIO) is also racing ahead with deliveries. NIO’s deliveries surged by over 25% month-over-month to 3,170 in December. NIO delivered over 20,000 vehicles in 2019 compared to 11,348 in 2018.

Legacy auto giants are also warming up for the EV battle. Ford has launched its first fully-electric vehicle, the Mustang-based Mach-E. Ford is also coming up with hybrid and all-electric versions of its F-150 truck. The EV line-up will be pivotal to Ford’s revival in China. General Motors is also looking forward to expanding its line-up of EVs with an eye on China.

German auto giant Volkswagen, the world’s biggest automaker, could be the biggest threat to Tesla’s dominance. Volkswagen recently announced plans to have a million EVs on the road by 2023. It has an existing production infrastructure that it can use to produce new EVs. As a result, it can quickly scale up its EV production—unlike Tesla, which has to build factories from scratch.

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In China, Volkswagen plans to have an initial capacity of 600,000 EVs at its two plants by next year. Thomas Ulbrich, a Volkswagen board member, said, “2020 will be a key year for the transformation of Volkswagen. With the market launch of the ID.3 and other attractive models in the ID. family, our electric offensive will also become visible on the roads.”

Tesla is still ahead of the competition, though

While others are gearing up for the war of EVs, Tesla still has the lead. Credit Suisse analyst Dan Levy said last month, “We believe Tesla is leading in the areas that will likely define the future of carmaking – software, and electrification.” He added, “Tesla is likely ahead of others on batteries – the core of the electric powertrain.”

Tesla has a leg up on NIO due to its production facilities. NIO doesn’t produce its own cars, which means it lacks control over the product and the production process. NIO faced a setback in late 2019 when a local government in China ended talks about building the first NIO factory. NIO’s finances are also in dire straits.

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While Ford (NYSE:F) is also betting big on China’s EV market, it’s struggling to scale up the production of the Mustang Mach-E, its first electric car. Ford will make only about 50,000 Mach-Es in the first year. Being a new entrant in the EV space, Ford may have to spend some time getting things in order and building vendor relationships, which works in Tesla’s favor.

Analysts are warming up to TSLA

Tesla’s Gigafactory ramp-up in China has Wall Street excited. Ives recently increased his price target on Tesla stock by $100 to $340. He cited US demand for the Model 3, Tesla’s increasing European presence, and the ramp-up in China as the reasons for the change. Oppenheimer analyst Colin Rusch also said in a note, “Expectations for a relatively smooth (production) ramp of Tesla’s China facility are increasing.” Rusch feels that Tesla’s experience with the production of the Model S, Model X, and Model 3 could aid in its Gigafactory 3 ramp-up.

CNBC Mad Money host Jim Cramer recently became bullish on Tesla stock. Last month, he said, “I don’t want you to own Ford, I want you to own the stock of Tesla.” He added, “I’m not saying one’s safer than the other, I’m saying they both have just O.K. balance sheets, but one’s got more upside.”

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Yesterday, Cramer upped his Tesla enthusiasm. He said, “Tesla has growth in spades; of course investors will pay up for it. GM has barely any growth. Ford’s actually shrinking. Nobody wants to pay up for stagnation.” He also said, “Wake me up when Tesla’s double the value of Ford and GM put together.” Ford and General Motors (NYSE:GM) together had a market cap of $90 billion as of yesterday’s close. Tesla’s market cap is $85 billion. In short, Cramer is looking at 100%+ upside in Tesla stock.

Ten out of 33 Wall Street analysts surveyed by Reuters have given Tesla “buy” ratings, while an equal number have given it “holds.” Thirteen analysts are recommending “sells” on Tesla stock. The stock’s average target price of $323.27 points to over a 34% downside. While Tesla’s Chinese operations are vital to its valuation, the Gigafactory 4 in Germany could be a bigger surprise.

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Why Gigafactory 4 may spell surprise for Tesla bears

While all the attention is currently on Tesla’s Gigafactory 3 in China, Germany could steal the show in the coming months. Last month, Bloomberg reported that Tesla had drafted a contract to buy about 3 million square meters of land near Berlin, the German capital. The Gigafactory 4 in Germany will be Tesla’s biggest, with the capacity to produce half a million cars annually and employ 10,000 people. If Tesla manages to move fast on the factory—as it did with the Gigafactory 3—it could be a game changer.

Europe leads the way when it comes to emission norms. Tesla is also seeing a surge in deliveries on the continent. In addition, Germany, the biggest economy in Europe, is pro-EV. While governments around the world are cutting EV subsidies, Germany recently increased EV subsidies by 50%. Germany’s relatively central location also means fewer logistical challenges in exporting Teslas to the other side of the Atlantic.

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Closing remarks

Tesla stock is firing on all cylinders. Musk’s company has surprised many with its scale-up, cost initiatives, and nimble management. Former GM Vice Chair Bob Lutz said yesterday, “Tesla is finally being run like a normal business.” He added, “[Musk has] reduced personnel and reduced unnecessary expenditures and has basically done what any other businessman would do in a situation where you’re selling a bunch of stuff but you’re not profitable.”

Tesla’s valuation still appears rich to many, if we go by analysts’ recommendations. Its China operations and upcoming Gigafactory 4 in Germany could shut critics down and convert a few more bears to the bull camp. With competition rising and car ownership models changing, it will be interesting to see if and how the company manages to do so.

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