According to Wolfe Research, Tesla (NYSE: TSLA) would stand to gain from the Inflation Reduction Act. Wolfe upgraded TSLA stock and raised its target price, joining the list of other brokerages who have been turning bullish on the EV (electric vehicle) company.
Last month, US President Joe Biden signed the Inflation Reduction Act. While the Act has many provisions, it also has several measures to increase EV adoption in the US. Previously, EV buyers in the US got a federal tax credit of up to $7,500.
However, once an automaker crossed the maximum threshold, the tax credit gradually came down. Tesla, General Motors, and Toyota cars stopped qualifying for the federal tax credit.
Beginning next year, even their cars would be eligible as the law does away with the upper limit. In order to boost domestic manufacturing, the law mandates that the cars have to be necessarily assembled in North America. The Act also has battery sourcing requirements beginning in 2024 and by 2029 the battery would need to be built in North America to be eligible for the tax credit.
Toyota recently increased the capex for its battery production plant in North Carolina. It expects to begin in 2025 which would help it meet the battery sourcing requirements. Biden has been trying to spur EV and chip production in the US and the administration has rolled out massive incentives to lure companies to produce these in the country.
Wolfe Research Raised Tesla Stock to a Buy
Wolfe Research upgraded Tesla stock to a buy and raised its earnings estimates. Analyst Rod Lache said, “With the passage of the IRA, Tesla’s mid-decade earnings power now appears much stronger. In fact, TSLA may be the only OEM positioned to achieve the full $7,500 Purchase Credit for the vehicles that they sell in the U.S before middecade.”
Notably, Tesla is much more vertically integrated than most automakers. It makes many components in-house and has been working to secure supplies of critical battery metals. Legacy automakers like Ford and General Motors have also been lately working to secure supplies as they ramp up their EV production.
Ford expects to reach an annual EV production run rate of 600,00 by the end of next year and 2 million cars by 2026. While some Wall Street analysts have turned bearish on Ford stock amid the recession concerns, billionaire hedge fund manager Ray Dalio bought more Ford shares in the second quarter.
TSLA is the largest EV company in the US
In the first half of 2022, Tesla lost its position as the world’s largest seller of new energy vehicles. However, the company is still the market leader in the US. TrueCar estimates that Tesla’s market share in the US almost doubled YoY and reached 4.1% in August. The figures are for the total car sales and not only EVs.
Tesla has a strong brand and good pricing power. The company announced a price hike last month amid higher input costs. Piper Sandler believes that TSLA would soon cut car prices. However, it still maintained its overweight rating and also raised the target price from $344 to $360.
The brokerage is cautious in the short term though due to the slowdown in China. Tesla lost production in China in the second quarter. Some parts of China are still locked down due to the spread of coronavirus. Both Xpeng Motors and Li Auto reported a month-on-month fall in their August deliveries. However, NIO’s deliveries increased in the month.
Apple’s Entry into Electric Cars is a Threat for Tesla
Strategic Vision conducted a survey of 200,000 new car buyers and for the first time, it included Apple cars on the list of potential cars that buyers would like to buy. The results showed that Toyota topped the list followed by Honda. 38% and 32% of the respondents respectively said that they would consider a Toyota or a Honda brand car in the future.
26% of the respondents said that they would ‘Definitely Consider’ an Apple car in the future. Ford came fourth with 21% while Tesla was in the fifth position with 20% saying they would consider a Tesla car in the future.
Tesla bulls like Gene Munster and Adam Jonas also believe that Apple’s entry into electric cars would be the biggest threat for Tesla. Meanwhile, Tesla remains among the most popular stocks for retail investors, including those who like to day trade in stocks.
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