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Tesla stock is 40% undervalued after Inflation Reduction Act signing, analyst argues

The Inflation Reduction Act's new $7,500 tax credit for electric vehicles could be a major tailwind to Tesla stock and the company's bottom line, contends CFRA analyst Garrett Nelson.

"The signing of the Inflation Reduction Act was the equivalent of 'Christmas in August' for Elon Musk & Co., as we peg Tesla as the biggest winner from the new law, as most versions of the industry's two bestselling EVs (Tesla's Model Y and Model 3) become eligible for the $7,500 federal EV tax credit effective January 1, 2023," Nelson wrote in a note to clients. "Previously, all Tesla vehicles had phased out of tax credit eligibility after hitting the 200K units per manufacturer cap."

Nelson lifted his price target on Tesla's stock to $1,245 from $1,125, which now assumes a 43% upside from current trading levels. Tesla's stock is Nelson's top pick from the auto sector.

The Inflation Reduction Act serves up a $7,500 tax credit to consumers for EVs priced up to $80,000 for trucks and $55,000 for cars. To qualify for the tax credit, buyers must earn less than $150,000 in household income if single or $300,000 as a household if married. The tax credit applies only to EVs assembled in North America.

Tesla's Model 3 and Y will find competition in 2023 for those looking to buy EVs due to the new tax credit. The base price for the Ford Mach-E crossover is around $43,000. GM's Chevy Bolt starts at about $38,000.

CEO of Tesla Motors Elon Musk speaks at the Tesla Giga Texas manufacturing
Tesla CEO Elon Musk speaks at the Tesla Giga Texas manufacturing "Cyber Rodeo" grand opening party on April 7, 2022 in Austin, Texas. (Photo by SUZANNE CORDEIRO/AFP via Getty Images)

Nelson thinks Tesla will be further aided by the Inflation Reduction Act's price stipulation meaning consumers may not purchase higher end models without a tax credit. Some of those more expensive offerings could come from the likes of Lucid, Polestar, and Mercedes.

"Moreover, the new law significantly alleviates concerns about EV competition, as roughly 70% of the 72 EV models currently for sale in the U.S. suddenly became ineligible for the tax credit under the new law," Nelson added.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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