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Tesla Stock Upgraded by Hong Kong Analyst: 3 Things You Need to Know

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Now here's something you don't see every day. On Monday, a formerly unheard-of stockpicker picked shares of Tesla (NASDAQ: TSLA) to outperform the market. The analyst in question, First Shanghai Securities (which despite the name, is actually based in Hong Kong), announced this morning that it is initiating coverage of Tesla stock with a buy rating, on the theory that CEO Elon Musk's electric-car venture "leads the global [electric vehicle] revolution."

According to data from StreetInsider.com, which reported the new rating this morning, Tesla stock is the only U.S.-listed stock First Shanghai has ever publicly recommended. So far, that's really all we know about the recommendation. But here are some things that might have influenced the analyst's decision -- and that should definitely be on investors' radar.

Tesla's Model 3. Image source: Tesla.

1. A recent deal in China

Last month, we learned that Tesla has struck a deal with the city of Shanghai to build a new factory within the Shanghai free trade zone. Reportedly, the new factory will be 100% Tesla-owned, i.e., the company will not be required to share ownership with a local Chinese partner, and thus will keep all of the profits earned from the factory for itself. Ordinarily, cars manufactured by a 100%-foreign-owned factory would be charged 25% import tariffs when sold in China. Some analysts, however, believe that Tesla may have negotiated with Shanghai a workaround to this requirement, which would permit Tesla to sell cars sans the 25% tariff.

2. A new vehicle unveiling

Over the weekend, Musk tweeted an announcement:

Tesla Semi Truck unveil to be webcast live on Thursday at 8pm! This will blow your mind clear out of your skull and into an alternate dimension. Just need to find my portal gun ...

— Elon Musk (@elonmusk)

Reportedly, the new all-electric semitruck will be of "Class 8" size and offer truckers a range of between 300 and 450 miles on a full charge -- perhaps shorter than ideal for long-haul truckers, but a range as much as 100 miles farther than what Tesla's Model S can achieve today. With this news item on the immediate horizon, Tesla stock might be poised to enjoy a bump in stock price.

3. Reason for caution

Earlier this month, Tesla reported its biggest-ever quarterly loss, combined with a three-month delay in ramping up Model 3 sedan production to the company's targeted level of 5,000 cars per week. Tesla stock lost 7% of its value overnight after that news broke, and hasn't really recovered much since. If Thursday's "big" news ends up being not Tesla's creation of a fully electric semi, but the fact that the semi in question can only drive about half as far in a day as most long-haul truckers need it to drive to be useful, Tesla's stock could suffer again.

Which way the news winds blow, though, is something we won't know for certain until Thursday night.

Caveat investor

Here are several things we do know now, though, and that investors (and potential investors) would be wise to keep in mind:

  • Tesla has never earned a profit. It's not expected to earn a profit this year, or next year either.
  • As bad as Tesla's losses look, its cash situation is even worse. Over the last 12 months, Tesla reported GAAP losses of $1.4 billion. Its free cash flow, meanwhile, ran to negative $7 billion -- more than three times as bad.
  • Even with an endorsement from a Hong Kong analyst, Tesla remains an extremely speculative stock, valued largely on profits that investors hope it will eventually earn but that it so far has failed to achieve. Mind you, this doesn't mean that the stock won't eventually work out well. But lacking solid numbers to hang a valuation on makes it exceedingly hard to determine what price is a fair price for Tesla stock.

Buyer beware.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.