Tesla Set to Boost Revenue and Margins with China Breakthrough, Analyst Predicts

BofA Securities analyst John Murphy reiterated a Buy rating on Tesla Inc TSLA with a price target of $220.

The re-rating reflected Tesla’s first-quarter commentary and results along with near-term catalysts for the stock, including the China breakthrough reports, the August Robotaxi event, a new product launch by early 2025, and the potential licensing of FSD. Further, Murphy added that TSLA would benefit should EV demand recover.

Also Read: Tesla’s Robotaxi Plans: Potential Threat Or Future Partner For Uber?

Recent reports indicated that Tesla received China’s approval to launch its Full Self-Driving (FSD) technology in the country. 

China is the world’s largest automotive market in terms of new vehicle sales, and if confirmed, this approval will enable TSLA to deploy its FSD driver-assistance system there. 

Murphy added that TSLA is also the only Western manufacturer to have been included in China’s list of companies that meet automotive data security requirements alongside domestic manufacturers.

Potential FSD revenue in China would be small relative to the sales TSLA generates from its vehicles. However, Murphy stated that it could be a more meaningful benefit to earnings as it could have a much higher margin. 

According to IHS, TSLA has sold 1.6 million vehicles in China since entering the market. Assuming Tesla charges an amount similar to what it currently charges in the US ($99/month) and that ~25% of current TSLA owners decide to use the technology, this would add only around $0.5 billion in annual revenue. However, with a gross margin likely to exceed 70%, the earnings benefit could be ~$ $350 million (70% X ~$ $0.5 billion), as per the analyst. 

Murphy said this number could increase meaningfully over time and, based on IHS projections for TSLA’s China auto sales, could be $2.3 billion in annual earnings by 2030 under the same assumptions.

The deal could enhance Tesla’s FSD’s capabilities, as the neural network’s learning and training may benefit from more experience and miles. 

However, given the competitive nature of the auto industry, especially in China, the analyst flagged a risk that the deployment of FSD is a necessary feature rather than an incremental product consumers pay for, relegating FSD to the many advancements in auto tech that benefit consumers and not companies unless true level 4-5 autonomous capability is achieved ahead of others.

Competition is increasing from domestic manufacturers and FSD will help TSLA catch up to, and potentially exceed, other EV offerings on the market, as per Murphy. 

Combined with recent price cuts in China (by 14,000 yuan, or ~$1,930), this could spur volume growth. 

Murphy caveated this, however, by noting that growth in China EV sales slowed to 14.7% in the first quarter of 2024, the weakest since the second quarter of 2023.

Tesla stock gained over 13% in the last 12 months. Investors can gain exposure to the stock via Tidal ETF Trust II The Meet Kevin Pricing Power ETF PP and Vanguard Consumer Discretion ETF VCR.

Price Action: TSLA shares traded lower by 5.51% at $183.32 at the last check Tuesday.

Also Read: Tesla Is Navigating Free FSD Trials, Gigafactory Challenges, and Governance Hurdles: Analyst

Tesla cars. Photo via Shutterstock