Don’t rely on China
“I’ve spoken to investors that believe Tesla has 50 percent market share in China, such as AI, robotaxi, etc.,” he asserted. “To us, this is comparable to an American telecommunications firm operating in China. It’s not simply where the market goes.”
Tesla’s exposure to China has recently come under scrutiny as Beijing cracks down on homegrown technology firms such as Didi Global, the ride-hailing giant. Tesla has initiated a series of recalls in China over the last year, and has recently faced a public relations crisis there.
According to FactSet, China is Tesla’s second-largest revenue source, trailing only the United States. In addition, the California-based company built its first vehicle assembly plant outside of the United States in China.
“China is rapidly becoming the global leader in electric vehicle adoption, and it is a market critical to Tesla’s mission to accelerate the world’s transition to sustainable energy,” Musk said in a statement released in January 2019 when the company broke ground on the factory.
In an interview on Thursday, Jonas stated that he remains “very constructive” on Tesla, noting that he has an overweight rating on the stock and a price target of $900, which would return it to its all-time high set in January. Tesla was trading around $642 per share Thursday afternoon, during a volatile year in which the stock fell below $600 a few times in 2021.
However, Jonas believes the company’s ability to dominate in China and other international markets must be viewed realistically as the auto industry pursues an autonomous vehicle future that will necessitate advanced technologies such as artificial intelligence and generate massive amounts of data.
“We’re skeptical about the long-term viability of foreign companies that use dual-purpose, arguably military-grade AI, for civilian use in natural monopoly networks in foreign countries,” Jonas said. “It’s not just China; we believe other countries will begin to view the automotive industry as a utility that supports the country’s GDP and national security.”
Jonas provided a hypothetical for those who questioned his point of view.
“Imagine a Chinese transportation and autonomy company… operating in the cities of Boston or Miami. Is that something that could actually happen? No, I don’t think so. Without naming China, we believe this is where these industries are headed. When you connect the cars and add AI, it becomes extremely sensitive.”
To be sure, there is room for Tesla to grow in international markets, according to Jonas. However, in the long run, the analyst believes Tesla will be able to justify its projected valuation through other revenue drivers.
“We are optimistic about Tesla because of their growth, not so much geographically or internationally — yes, there is opportunity — but rather in expanding their model lineup from four today to perhaps 24 in the coming years,” Jonas said. “Addressing markets such as vans, trucks, SUVs, and fleets, which they do not currently address. And then there’s that recurring software-based revenue… which we believe has far more potential than our $900 target.”
Jonas predicted that Tesla will have 40 million vehicles on the road by the end of the decade, up from about 1.3 million now.
“You can put any [average revenue per user] on that… $50, $100, a few hundred dollars a month. You don’t even need complete autonomy to start generating tens of billions of dollars in recurring software revenue. Very high margin, 60-70 percent type margin.”
Jonas compared the situation to when investors began to take Apple’s addition of software revenue seriously, which led to a rerating of the stock compared to earlier days when iPhone and Mac computer sales were the cornerstone metrics.
“That moment hasn’t come for Tesla yet,” Jonas said. “Tesla is still being covered by auto analysts who probably shouldn’t be, and when you let the tech community get ahold of it and see the software opportunity, that’s what I’m channeling. Yes, units are important, but you don’t need to own half of the Chinese market to make money from software.”
Delisting Chinese stocks
Just days after Didi’s public debut last week, Chinese regulators announced a cybersecurity review. The Chinese cabinet also announced on Tuesday that it would strengthen oversight of domestic firms listed abroad.
Cowen, on the other hand, believes China’s crackdown on its U.S.-listed companies is insufficient to persuade American lawmakers to repeal oversight requirements enacted last year.
“China’s response to the DiDi Global IPO reinforces our view that the Chinese government will not grant US market regulators the authority to inspect the audits of Chinese companies listed on US exchanges,” Cowen analyst Jaret Seiberg said.
In 2020, the Senate passed legislation that would delist foreign companies that refuse to provide U.S. regulators with access to their audits after three years.
The move came shortly after Chinese-based coffee chain Luckin Coffee, once thought to be a promising Starbucks competitor, revealed that its chief operating officer lied about 2019 sales by more than $300 million.
With regard to recent Didi developments, Seiberg stated that “China’s decision to frame audit access as a national security threat means China will not back down.”
“To us, this implies that delisting of Chinese companies appears to be unavoidable,” Seiberg added.
According to Cowen, the move by Chinese regulators to tighten oversight of domestic companies may, at best, postpone the delisting requirement. However, the firm believes that the three-year deadline will be extended due to a “lack of goodwill on both sides.”
Meanwhile, Bloomberg News reported on Wednesday that Chinese regulators are considering a rule change that would allow them to prevent a domestic company from listing in the United States, citing sources familiar with the situation.