Tesla Ticks All the Boxes — And Its Stock Is a Buy, Says Morgan Stanley

On April 18, 2023, the U.S. Internal Revenue Service, and the U.S. Department of Energy, changed the law on electric vehicle purchases.

In accordance with the new Inflation Reduction Act signed into law by President Biden on August 16, 2022, the IRS and DoE confirmed that from April 18, 2023 onward, EVs sold in the U.S. can qualify for up to $7,500 in federal income tax rebates if:

• the buyer’s adjusted gross income in the year the EV is purchased does not exceed $150,000 ($300,000 for married couples filing jointly), and
• the EV in question doesn’t cost more than $55,000 (for cars) or $80,000 (for vans, trucks, and SUVs) new.

Assuming both these boxes are ticked, the $7,500 tax credit may apply — and whether it does apply depends on two more requirements:

• If at least 50% of the value of the EV’s battery components were produced or assembled in North America, then the EV qualifies for a $3,750 credit; and or
• if at least 40% of the value of the “critical materials” used to build the battery were sourced from the U.S. or another country with which the U.S. has a free trade agreement in place, then the EV qualifies for the other half of the $7,500 credit — $3,750 more. 

Now, the bad news is that Tesla (NASDAQ:TSLA) doesn’t control the first of these four requirements (at least, not unless you work for Tesla). But the good news is that Tesla does largely control the last three requirements — and as of today, Tesla has successfully ticked all of these latter boxes for buyers of its Model 3 line of electric sedans.

As Morgan Stanley analyst Adam Jonas pointed out in a note last night, all three variants of the Model 3 now qualify for the full $7,500 federal tax credit. As a result, the entry level price for owning a Tesla EV has dropped from $40,240 (plus $1,390 for delivery) to just $34,130 for the Model 3 RWD. What’s more, the DoE has confirmed Tesla’s statement, and all three Model 3 variants now show up on its up-to-date list of EVs qualifying for the credit.

Jonas observes that prior to this update, only one Model 3 — the “Performance” model — qualified for the full tax credit, while the other two models got only $3,500 credits. And the analyst surmises that the reason for the change is that “Tesla likely tweaked its supply chain to meet both [of the last two] requirements.” Specifically, Jonas guesses that Tesla is either using Chinese cells to produce battery packs for the Model 3 in the U.S. (rather than importing packs entire, from China); and/or Tesla may have diverted Chinese battery packs to power Teslas produced for Canada rather than the U.S. — freeing up more U.S. content to be used in Teslas sold here.

Or Tesla’s lawyers and engineers may have pulled an all-nighter, and used “an alternate method for calculating the critical mineral content” of its batteries to meet at least the letter of the DoE’s requirements.

Whichever route Tesla took, it has now successfully arrived at a point where all of its Model 3s now qualify for the full $7,500 credit, helping Tesla to underprice many of its U.S. rivals in the EV space.

In Jonas’ view, this is yet another reason to buy Tesla stock — which he rates as Overweight (i.e. Buy). (To watch Jonas’ track record, click here)

Let’s turn our attention now to the rest of the Street, where based on 14 Buys, 10 Holds, and 4 Sells, TSLA currently carries a Moderate Buy consensus rating. Although with an average price target of $198.54, the analysts project ~13% downside over the coming months. Either the analysts have yet to update their TSLA models, or perhaps some believe the stock has soared enough for now. (See TSLA stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.