Andrew Willis: Elon Musk has long made it clear that he doesn't like tax credits for electric vehicles. After all, Tesla TSLA had to get where it is today without the support we see in the Inflation Reduction Act.
Senior equity analyst Seth Goldstein says the act includes a $7,500 tax credit that most Teslas won’t qualify for, in part due to the price tag of their luxury electric vehicles. Another reason for the exclusion of Elon is the fact that the act includes a provision that a growing percentage of raw materials must be extracted in the U.S., or with countries where the U.S. has a free trade agreement.
The recent developments in U.S. EV policy aren’t great for Tesla, which currently sources its lithium for batteries in Argentina and processes it in China. In fairness to the company, as we discussed last week, there is currently only one lithium producer in the U.S., producing a small fraction of the metals needed for EVs. And when more local production comes online, how easy will it be for Tesla to switch suppliers, compared with competitors that are still setting up their supply chains?
At the scale of production that Tesla is at today, we believe it would take years to reach the necessary proportion of vehicles with "locally sourced" batteries. At the same time, with factories built from scratch, when it comes to cost advantages, we think that Tesla is years ahead of its competitors.
Tesla’s intellectual property and brand prestige aren’t likely to be impaired anytime soon, either. Consider how the company has little to no spending on advertising, which is rare for a consumer brand. For investors, in light of the tax credit news, it’s also worth considering how much of the premium for a Tesla is already priced in.
From Morningstar, I'm Andrew Willis. Check out Morningstar.ca to watch Stock of the Week: Bausch Health