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Tesla (TSLA) is one stock that remains in the spotlight every week. After missing on second-quarter earnings, Tesla is now reportedly considering selling or spinning off its China business to clear a potential path toward a merger with SpaceX (SPCX), according to a report from The Wall Street Journal. CEO Elon Musk has dismissed the report as “absurdly fake news.” Still, the speculation raises an important question for Tesla investors: What would happen to TSLA stock if the company actually separated its China operations?
The idea is tied to national security concerns surrounding SpaceX’s U.S. government and defense contracts. Separating Tesla’s China business could theoretically make a combination easier from a regulatory standpoint. Reuters also notes that Tesla’s China operations could be difficult to separate given the importance of the company's Shanghai factory to global production.
Tesla Stock Has Taken a Major Hit in 2026
Shares of Tesla have had a rough stretch after starting the year with strong momentum. TSLA stock has fallen roughly 28% in 2026, recently slipping below the $300 level on the disappointing Q2 results before recovering closer to $323 per share today. Investors are increasingly worried about Tesla’s profit margins, intense electric vehicle (EV) competition, and massive spending on artificial intelligence (AI), robotics and autonomy.
TSLA stock has also remained highly volatile as investors debate whether its future growth will come from selling more cars or from businesses such as Robotaxi and Optimus. That makes the China separation story important, but probably not the biggest driver of Tesla stock right now.
Another concern for investors is Tesla's sky-high valuation. At a market capitalization of roughly $1.3 trillion, Tesla trades at around 357 times trailing earnings and 348 times forward earnings, according to Barchart data. The price-to-sales (P/S) ratio is also above 13 times. Those multiples are difficult to justify using traditional automaker metrics.
The bull case depends heavily on Tesla becoming much more than an EV manufacturer. Investors are paying for potential growth in autonomous driving (AD), robotaxis, AI, and humanoid robots. That means any restructuring involving China could have a bigger impact on sentiment than on Tesla’s near-term earnings.
Tesla Q2 Results Showed the Real Problem
Tesla’s latest quarterly results highlighted why investors are focused on execution. The company delivered 480,126 vehicles in Q2, up about 25% from a year earlier. Revenue reached roughly $28.2 billion, up 26% from the prior-year period, but profitability weakened sharply.
Operating income fell 57% year-over-year (YOY) to $398 million, while GAAP net income dropped 5% YOY to about $1.1 billion. Tesla also spent approximately $5.8 billion on capital expenditures, pushing free cash flow into negative territory.
That spending is critical to Musk’s long-term strategy. But it also puts more pressure on Tesla to turn its AI and robotics investments into meaningful revenue.
Tesla Is Betting Big Beyond China
A China separation would not mean that Tesla is abandoning growth. The company continues to expand its Full Self-Driving (FSD) technology, energy-storage business, and AI efforts. It is also investing heavily in Robotaxi, Optimus, and new manufacturing capacity.
Tesla deployed 13.5 GWh of energy-storage products in Q2, while its broader energy business continues to provide an increasingly important source of revenue. Meanwhile, Musk continues to position Tesla as an AI and robotics company rather than just an automaker.
That strategy could eventually make a potential SpaceX combination more logical. But for shareholders, the immediate question is whether Tesla can fund those ambitions while keeping its core automotive business profitable.
Wall Street Remains Split on Tesla Stock
Wall Street is hardly unanimous on TSLA stock. The consensus among 42 analysts is a “Moderate Buy” rating, and after the recent pullback, the mean price target of $400.80 represents potential upside of 24% from current levels.
Separately, Morgan Stanley has an “Equal Weight” rating and a price target of $400 on TSLA stock, while other analysts remain more cautious after Tesla’s heavy capital spending and earnings pressure. Recent consensus data shows a wide range of targets, with the highest target reaching $600 and the lowest target at $123.
The bullish case rests on Tesla’s potential leadership in autonomy, AI, and robotics. For now, the China-sale report is still only speculation. But if Tesla does pursue a separation to make a SpaceX merger possible, investors could face a much bigger strategic transformation than the stock’s recent volatility suggests.
On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
