Morgan Stanley: Tesla China Margins Could Exceed 30%

Tesla Inc TSLA shares have been on a tear in the past month, and the stock has now erased all its early 2019 losses. On Wednesday, one big analyst said investors may not be appreciating just how much of a margin boost Tesla’s Shanghai factory will provide.

The Analyst

Morgan Stanley analyst Adam Jonas reiterated his Equal-Weight rating and $250 price target for Tesla.

The Thesis

Jonas said producing vehicles in Silicon Valley has been a major drag on Tesla’s profitability, but the new China Gigafactory will be a completely different story.

“Consider labor at 1/10th California wages and other cost reductions (BOM, D&A, logistics, etc.) and we may see Tesla China gross margins pushing the mid-30% range,” Jonas wrote in a note.

China is home to the largest luxury and electric vehicle market in the world, and Jonas said Tesla investors may not fully appreciate the profit opportunity Tesla has there. Porsche already operates in China at gross margins of above 30%.

Looking ahead, Jonas estimates Tesla China sales could add roughly $4 to the company’s 2022 EPS, or roughly $60 per share in value to Tesla’s stock at an earnings multiple of 15 times.

Despite the opportunity in China, Jonas remains cautious on Tesla shares for now given the poor track record other U.S. tech companies have in gaining market share in China.

Benzinga’s Take

Tesla shares have rallied significantly in the past month, but the stock has a long history of extreme volatility. Overall, Tesla shares are now up 43.8% in the past five years compared to a 52.6% gain by the S&P 500 in that time.

Tesla's stock traded around $354.21 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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