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Tesla faces ‘black eye moment’ over China recall, says bullish analyst

Tesla has one big task ahead. Set things right in China.

That’s according to Dan Ives, a bullish analyst at Wedbush, who said Chief Executive Officer Elon Musk and his company are facing a “black eye moment” following Saturday’s announcement by China regulators, that almost all of the autos it has delivered will need a software fix to address safety issues linked to the cruise-control system.

“Let’s be clear, this is not the news bulls want to see as it adds to the negative PR issues in China, which is poised to represent 40% of global deliveries for Tesla by next year,” said Ives, in a note to clients on Sunday.

Probing possible defects of Tesla’s
TSLA,
+2.50%

electric autos, China’s State Administration for Market Regulation said it found the cruise-control system could be activated by accident, and cause a sudden speed surge. Owners of the affected cars — 249,855 Model 3 sedans and Model Y compact crossover vehicles from Tesla’s Shanghai plant, and 35,665 imported Model 3 cars — will be able to upgrade that fix remotely.

The regulator said it had received the request by Tesla a few days earlier to get the update pushed through.

Ives said he is sticking to an outperform rating and a $1,000 12-month price target on Tesla, but stressed that Tesla is now facing a “moment of truth” in China.

It’s “about Musk & Co. making sure these issues are in the rear mirror, correcting software/autopilot problems, and moving forward to make sure this situation is not a defining negative chapter in the Tesla China story,” he said.

“China demand is a key driver for the long term Tesla growth story and the company must play nice in the sandbox with Beijing around safety issues,” added Ives.

Of course, some pointed out that the recall was merely a software update, and not one in the traditional auto sense, noting that even the regulator said Tesla itself had requested the fix.

So far, investors appeared to be taking the news in stride, with shares of Tesla down 0.3% in premarket trading on Monday. But the year has been a struggle for Tesla shares to gain traction, as they are down just over 4% year to date, following a 743% surge in 2020.

Ives said the China recalls are probably a “bump in the road” and do not derail his long-term bullish thesis on the company, but that that could change if Tesla doesn’t smooth out its autopilot safety problems going forward — a “lingering PR black cloud.”

Shares of Tesla rallied earlier this month after data from China showed a rebound in the electric vehicle maker’s sales in May. While sales of passenger cars in May rose 1% from a year ago, EV sales surged 177%. Tesla sold 21,936 EVs made in Shanghai in China in May, up from 11,671 in April.

That followed a slump in April sales, which were blamed in part by some unfortunate publicity for the auto maker. One widely publicized event in April saw a protester climb on a Tesla auto at the Shanghai Auto Expo, shouting allegations over faulty brakes. The auto maker received a rare rebuke earlier in the year from China regulators, who warned it to abide by the country’s laws amid customer complaints about quality.

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