Tesla shares could drop to $10 each due to China trade war, Morgan Stanley says

Tesla chief executive Elon Musk at the unveiling of his new Model Y, April 2019 - AFP

Morgan Stanley has cut its worst case scenario forecast for shares in the electric vehicle maker Tesla from $97 (£76) to just $10 due to fears that it could be entangled in the USA's trade war with China.

The investment bank's analysts said the "highly volatile trade situation" could slash Tesla's expected car sales in China in half and lead to restrictions on its products by either country's government.

The new worst case price would be a 95pc drop for Tesla's shares, which are currently trading at around $205, although the bank maintained its main price target at around $230 and its best case scenario at $391.

It comes after Wedbush cut its price target from $275 to $230 due to the risk of distraction from chief executive Elon Musk's "sci-fi projects", while Baird cut its estimates from $400 to $340.

“Our revised bear case assumes Tesla misses our current Chinese volume forecast by roughly half to account for the highly volatile trade situation in the region, particularly around areas of technology, which we believe run a high and increasing risk of government/regulatory attention,” said Morgan Stanley's research note, which also cited concerns about Tesla's increased debt load.

But it added: “Based on our discussions with auto companies, suppliers, and technology firms, Tesla’s strategic value and technical competency in both hardware and software remains extremely high if not in a league of its own.”

Tesla's shares slumped by more than 10pc in April after it reported its worst ever quarterly drop in new car deliveries, wiping more than $5bn from its market value. “This is the most difficult logistics problem I’ve ever seen, and I’ve seen some tough ones,” Mr Musk told investors, warning that he was not expecting to make a profit until the second half of 2019.

Last week, a former Tesla engineer sued the company for defamation, accusing it of trying to "silence" its employees with "one-sided" arbitration agreements an public allegations about her conduct.