Tesla powering up to dominate China

2020 is a pivotal year for Elon Musk & Co.

Wall Street is thinking big when it comes to Tesla's prospects in China.

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The first Model 3 sedans began rolling off the company's Shanghai assembly line last week, setting billionaire entrepreneur Elon Musk's electric-vehicle maker up to grab a tremendous share of the world’s largest auto market.

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“If Tesla's Model 3 market share in the United States can be replicated in China -- and if this logic extends also to Model Y -- then Tesla's annual volume in China alone would eventually exceed 650,000 units,” wrote Alexander Potter, a senior research analyst at the Minneapolis-based investment bank Piper Sandler, who raised his price target from $423 to $553, or 15 percent above where shares settled Thursday.

TickerSecurityLastChangeChange %
TSLATESLA INC.566.14+8.12+1.46%

Tesla has captured 18.9 percent of the market for luxury sedans in the U.S., selling 183,000 Model 3s in the past 12 months.

A similar position on China would yield an annual sales volume of more than 360,000 Model 3s, Potter said, adding that a similar market share in the SUV market would result in the sale of 290,000 more vehicles.

It will take time, however, for Tesla’s China business to get to those levels. Potter projects 112,000 deliveries in 2020 with that number ramping up to 399,000 in 2022.

Tesla, for its part, has said it hopes to produce 250,000 vehicles at its Shanghai Gigafactory each year.

Dan Ives, managing director at the Los Angeles-based investment bank Wedbush Securities, says that while recent price cuts in China will help, “competition on the electric vehicle front remains fierce in the country, with a number of lower-price alternatives.”

Tesla is making its initial foray into the country as one of its biggest electric-vehicle competitors there bleeds cash. Nio, often referred to as the “Tesla of China,” lost $352.8 million in the third quarter, slashing its cash balance to $274.3 million. The company said continuing to operate depends on its ability to “obtain sufficient external equity or debt-financing.”

Other electric-vehicle makers in the country include the Warren Buffett-backed BYD, Volvo-parent Geely Automotive Group and Volkswagen and GM partner SAIC Motor.

“2020 represents a pivotal year for Musk & Co., as ultimately this will be the year the bulls have been waiting for, with China coming on board and Musk’s grand electric vehicle vision" starting to take hold, he said. There's also a chance, though, that the company "hits another stumble," Ives wrote Thursday, in which case "the bears will come quickly out of hibernation mode." He maintained his “neutral” rating and a $370 price target.

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Tesla shares climbed 15.1 percent this year through Thursday.