'Don't rely on China' as a top reason to buy Tesla shares, Morgan Stanley's Adam Jonas says

Published Thu, Jul 8 20211:53 PM EDTUpdated Thu, Jul 8 20212:42 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Morgan Stanley auto analyst Adam Jonas had a warning Thursday for Tesla shareholders who are betting on the Elon Musk -led electric vehicle maker dominating in China. "We encourage investors to say, don't rely on China, for example, as your No. 1 reason why you own Tesla," Jonas said in an interview on CNBC's "Squawk on the Street." "I talk to some investors that think Tesla will have 50% market share of like AI, robotaxi or something in China." he argued. "To us, that would be equivalent to a U.S. telecom company operating in China. It's just not where the market is going." Tesla's exposure to China is being looked at in new light recently , as Beijing cracks down on homegrown technology firms such as ride-hailing giant Didi Global . Tesla initiated a series of recalls in China over the last year — and more recently has weathered a public relations crisis there . China is Tesla's second-largest country for revenue, behind the United States, according to FactSet estimates. The California-based company also built its first vehicle assembly plant outside the U.S. in China. " China is becoming the global leader in electric vehicle adoption, and it is a market that is critical to Tesla's mission to accelerate the world's transition to sustainable energy," Musk said in January 2019 statement when the company broke ground on the factory. In Thursday's CNBC interview, Jonas said he continues to hold a "very constructive" view on Tesla, noting he has an overweight rating on the stock and a price target of $900, which would take it back to its all-time high set in January. Tesla traded around $642 per share Thursday afternoon, during a volatile year that saw the stock close below $600 a handful of times in 2021. However, Jonas said the company's ability to dominate in China and other markets abroad must be viewed realistically as the auto industry pursues an autonomous vehicle future, which requires advanced technologies like artificial intelligence and would generate troves of data. "We're pretty skeptical on the long-term future of foreign companies that operate in dual purpose, arguably military-grade AI, for civilian use in natural monopoly networks in foreign countries," Jonas contended. "It's not just China; we think other nations are going to start looking at the automotive industry like a utility where the GDP and national security of the country runs on it." For people who doubt that view, Jonas offered up a hypothetical. "Imagine a Chinese transportation, autonomy company ... conducting its services in the city of Boston or Miami. Would that be something that would really be realistic? Don't think so. Without singling out China, we think this is just where these industries are going. When you connect the cars and add the AI, it gets real sensitive." To be sure, there is expansion across international markets to be had for Tesla, Jonas said. But big picture, the analyst said he believes Tesla will be able to justify his projected valuation with other revenue drivers. "We are positive on Tesla due to their growth not so much geographically, internationally — yes, there is opportunity — but more taking their model lineup from just four today to maybe 24 in the coming years," Jonas said. "Addressing markets like vans and trucks and SUVs and fleets, which they don't today. And then getting into that recurring software-based revenue ... which we think could have potential well beyond our $900 target." Jonas said he expects Tesla to have 40 million vehicles on the road by the end of the decade, up from about 1.3 million at present. "You put an [average revenue per user] of anything on that ... $50, $100, a few hundred bucks a month. You don't even need full autonomy and you start getting many, many tens of billions [of dollars] of recurring software revenue. Very high margin, 60%, 70% type margin." Jonas likened that situation to when investors began to take Apple 's addition of software revenue seriously, which helped lead to a rerating of the stock compared with earlier days of when sales of iPhone and Mac computers were the cornerstone metric. "That moment hasn't happened yet for Tesla," Jonas said. "Tesla is still covered by auto analysts that probably shouldn't be covering it, and when you let the tech community get ahold and see the software opportunity, that's what I'm channeling. Yes, the units are important, but you don't need to have half the Chinese market to get the software revenue." — CNBC's Lora Kolodny contributed to this report.

Tesla boss Elon Musk (L) walks with Shanghai Mayor Ying Yong during the ground-breaking ceremony for a Tesla factory in Shanghai on January 7, 2019. - Musk presided over the ground-breaking for a Shanghai factory that will allow the electric-car manufacturer to dodge the China-US tariff crossfire and sell directly to the world's biggest market for 'green' vehicles.

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Morgan Stanley auto analyst Adam Jonas had a warning Thursday for Tesla shareholders who are betting on the Elon Musk-led electric vehicle maker dominating in China.

"We encourage investors to say, don't rely on China, for example, as your No. 1 reason why you own Tesla," Jonas said in an interview on CNBC's "Squawk on the Street."

"I talk to some investors that think Tesla will have 50% market share of like AI, robotaxi or something in China." he argued. "To us, that would be equivalent to a U.S. telecom company operating in China. It's just not where the market is going."