Morgan Stanley analyst Adam Jonas named Tesla his top pick in the electric vehicle industry on Wednesday, just hours before the EV maker is set to report earnings. The widely-followed analyst also lowered his price target on the stock to $220 from $250, but the new forecast still implies upside of more than 52% from Tuesday's close. "In a world of deflationary EV pricing, we believe Tesla can leverage their industry leading margins, and manufacturing scale to grow the market and 'tax' the competition," Jonas said in note. "Considering many EV makers globally are struggling to sell EVs at positive profit margins, Tesla has room to undercut the competition and still maintain profitability." Jonas laid out what he's looking for from the company's fourth-quarter report, which is slated for release after the closing bell. Tesla's stock has been weighed down since the third quarter earnings release in October, when the company reported weaker revenue than analysts had estimated, alongside adjusted earnings that topped expectations. There's also been concern that CEO Elon Musk has been distracted by his purchase of Twitter in late October, and that he raised money partly by selling some of his Tesla shares. Still, Wall Street has upbeat expectations for Tesla's fourth quarter, with both the top and bottom line expected to gain more than 30%, according to Refinitiv. TSLA 6M line Tesla stock slump over the last 6 months Jonas' take The first thing on Jonas's radar is how Tesla's gross margins held up in the fourth quarter, when the company began cutting prices on some models. He's also watching the potential impact of Tesla offering more of its full self-driving [FSD] features to consumers, which could drive profits. "4Q may be particularly hard to read due to the potential recognition of a significant amount of deferred revenue from offering a greatly expanded feature set from FSD to a broader population of consumers," Jonas said in a Jan. 24 note. "Among a range of attach rate and accounting assumptions, we are prepared for the FSD unlock to potentially add several hundred million dollars to automotive gross profit, or potentially up to 300 to 500bps of gross margin." Jonas excludes the impact of the FSD offerings as well as zero-emission vehicle credits to arrive at his estimate that auto gross margins will fall to 26.2% in the fourth quarter from 27.9% in the third quarter and 23.3% for all of 2023. Price cuts Jonas will also closely monitor Tesla's average transaction price [ATP] projections following the price cuts, and notes that investors will also listen closely for any forward guidance. "Due to final vehicle mix/geographic mix, order book, and timing of prior price hikes, investors have quite a wide range of outcomes on ATP deflation for Tesla in 2023," he wrote. "We think the bogey today is for slightly more than 100% of prior year (FY22) inflation to be given back, taking ATPs to a $45k to $48k range." He also expects that Tesla management will cheer positive reactions to the recent price cuts and reiterate its goal to grow 50% annually. "While we expect cautionary language on the macroeconomic environment (risk of recession), we nevertheless expect Tesla to express a view that demand is not a problem," he said. "In our view, the price cuts are indeed in response to slowing incremental demand relative to incremental supply." Cost cutting actions and future estimates As Tesla looks ahead to a potential recession, Jonas will also watch for signs that the company is looking to cut costs, restructure or otherwise adapt to the labor backdrop. "In an environment where a wide range of tech firms are announcing material headcount cuts in recent days, does Tesla not also have an opportunity to adapt its labor footprint to a slowing environment?" said Jonas. He added that while the earnings call is likely not the place to announce such measures, a focus on cost management should be prominent in the discussion. Beyond the earnings proper, he'll be watching for where consensus settles on the company's full-year earnings per share. This will be an important data point for investors who want to commit capital, he said. "While the recent bear 40pct rally in Tesla shares appears largely technical and macro driven, we believe investors must have confidence that FY earnings have 'bottomed' before seriously revisiting the stock," he said, adding that the process will extend beyond even Tesla's Investor Day, scheduled for March 1.