Tesla (TSLA) stock’s recent decline has reached attractive levels, and it’s time for investors to start positioning for an upswing, Piper Sandler argued in a new note.
"Tesla took longer than expected to cut prices, but now that pricing adjustments have been made and now that the valuation has reset, we think investors should be proactively buying TSLA,” research analyst Alexander E. Potter wrote in a note to clients on Wednesday.
Tesla shares have fallen more than 40% over the last three months since CEO Elon Musk bought Twitter. Many Wall Street analysts likened the stock’s decline to a “Twitter overhang," though the company also had other fundamental issues arise, including a fourth-quarter vehicle deliveries miss.
The electric vehicle maker has since responded with price cuts in major markets such as China, Europe, and the U.S. It also slashed prices by as much as 20% with its most recent cut on Jan. 13.
The U.S. price cuts moved Tesla’s basic model Y price down from $65,990 to $52,990, according to Reuters calculations. As the note pointed out, though, the discounts could be closer to 30% when considering the $7,500 federal tax credit for purchasing a U.S.-manufactured electric vehicle.
The more affordable pricing could increase demand, according to Piper Sandler, which currently has an Overweight rating and a $300 price target on the stock. The firm noted Tesla can now “easily achieve” at least 50% delivery growth in 2023.
“We don’t think most investors appreciate the extent to which lower pricing could support Tesla’s market share,” Potter wrote. “This is particularly true in the United States where lower prices, combined with a $7,500 tax credit, could unlock at least 300K units of incremental demand (if not twice that).”
Additionally, he added, the price cuts could help Tesla "poach demand" from competitors like GM (GM), Ford (F), and RAM, all of which have chipped away at Tesla's EV market share in recent years.
"The U.S. auto market has real ample real estate for Tesla to exploit," the note stated.
Tesla cutting prices has still raised concerns surrounding the company’s margins. Wall Street analysts, including Potter, have cut gross margin expectations to adjust for Tesla making less money per sale on its vehicles. Still, Potter argued, lower margins might not be as bad as feared for the automaker.
"We are hopeful that such drastic declines may not materialize, due to deflating raw material costs and better margins in Tesla Energy," he wrote. "Even more importantly, we suspect that the margin profile of new capacity in Shanghai, Austin, and Berlin is higher than many expect."
Tesla is expected to report 2022 Q4 earnings after the closing bell on Jan. 25.
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Josh is a reporter and producer for Yahoo Finance.
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