Morgan Stanley reiterates Overweight on Tesla as Model 3 qualifies for full $7500 tax credit

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Morgan Stanley reiterated an Overweight rating and $200.00 price target on Tesla (NASDAQ:TSLA) after the electric automaker announced that the company’s Model 3 will now qualify for the full $7,500 EV tax credits offered under the Inflation Reduction Act (IRA).

The consumer tax credit for clean vehicles, totaling $7,500, under the provisions of the IRA, is divided into two components. Electric vehicles (EVs) can receive $3,750 if 50% of the value of their battery components were manufactured or assembled in North America. The remaining $3,750 is contingent on 40% of the value of critical materials being obtained from the U.S. or another country with a free trade agreement.

During the weekend, Tesla made an announcement that all variants of their Model 3 vehicles now qualify for the full $7,500 federal tax credit. Previously, only the Model 3 Performance was eligible for the complete tax credit, indicating that Tesla likely made adjustments to their supply chain to meet both requirements.

Analysts wrote in a note, “Tesla is in the midst of an industry-wide EV price war, falling margins and EV market deceleration. If the company wasn't benefitting from significant government incentives (IRA) and price cuts (30% on Model Y YTD), Tesla could be burning cash – yet despite these headwinds, we remain OW. Within our coverage, we see Tesla as best positioned to navigate the geopolitical and economic challenges inherent in re-wiring the EV battery supply chain. More than 'AI play,' we believe Tesla's role in building a de-risked EV supply chain is underappreciated by the market.”

Up until now, Tesla's Fremont factory was receiving fully equipped LFP battery packs from Giga Shanghai for the Model 3. Tesla may have shifted production of those battery packs to the United States while continuing to use cells from China. Concurrently, Tesla vehicles sold in Canada are now being sourced from China, allowing for increased domestic battery production in the U.S. to cater to local deliveries.

Furthermore, regulatory semantics within the IRA guidance may have allowed the electric automaker to recalculate the critical mineral content in their batteries to offset the content within the Model 3 RWD, which normally would not qualify for the full tax credit.

Analysts note that, while Tesla updated its website to reflect these changes, the IRS has not made any changes to their official site.

Shares of TSLA are down 0.32% in pre-market trading on Tuesday.