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China will eventually be Tesla's biggest market, analyst predicts

  • Piper Jaffray reiterates its overweight rating for Tesla shares, predicting the electric car maker will thrive in China's auto market.
  • "China could eventually be Tesla's biggest source of revenue," the firm's analyst writes.

Tesla investors should get excited over the company's potential in the world's largest auto market, according to one Wall Street firm.

Piper Jaffray reiterated its overweight rating on Tesla shares, predicting the electric car maker will thrive in China.

"China could eventually be Tesla's biggest source of revenue," analyst Alexander Potter wrote in a note to clients Tuesday. "If Tesla sidesteps [its] obstacles by making EVs locally, the company may be well-positioned to build on its recent successes … The company was wise to delay investment, but once these JV-related policy details are finalized, we expect Tesla to announce its China strategy in relatively short order."

Tesla's China sales rose to $1.07 billion last year from $319 million in 2015, according to an SEC 10K filing.

Potter reaffirmed his $386 price target for Tesla shares, representing 12 percent upside to Tuesday's close.

He cited recent media reports that China may be willing to adjust its rules requiring international companies to partner with a local firm to manufacture vehicles in the country. The Wall Street Journal reported on Monday that the Asian country is considering the changes.

The analyst noted that 24.3 million vehicles were sold in China last year versus the peak U.S. year of 17 million cars. Potter is optimistic demand for luxury vehicles in China will also rise for years.

"Undoubtedly, authorities envision an army of Chinese companies emerging to dominate the global EV market. But dig deeper and the landscape appears less daunting," he wrote. "We find most of China's EVs are chintzy in comparison to Tesla's products … and realistically Tesla's most capable global peers are probably years away from releasing locally-built luxury EVs."

On the flip side, Bernstein analyst Toni Sacconaghi told investors on Wednesday to avoid buying Tesla shares at their current valuation due to Model 3 production risk.

Tesla's stock is up 62 percent this year versus the S&P 500's 12 percent return through Tuesday.

The company's stock fell 0.7 percent midday Wednesday amid the conflicting reports.

— CNBC's Michael Bloom contributed to this story.