Tesla's FSD Package Shows Automaker's Potential For Software Revenue

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Electric vehicle pioneer Tesla Inc TSLA could be even more successful if it pivots its business model to generating software revenue, according to a Morgan Stanley analyst. 

The Tesla Analyst

Adam Jonas has an Equal-weight rating on Tesla with a $680 price target. 

The Tesla Thesis

Pivoting Tesla's business model from selling cars to generating high-margin recurring software revenue is key to unlocking more bullish scenarios for the electric vehicle company, Jonas said in a Thursday note. (See his track record here.)

Tesla's full-self driving is an advanced driver assistance system, with the company now selling FSD as a software package on its vehicles for $7,000, while autopilot is part of all vehicles, the analyst said. 

FSD is a highly profitable revenue stream even now, but the attach rates are just over a quarter of the vehicles sold, he said.

Tesla's proportion of revenues from software and services is below 5%, Jonas said. 

Expanding the business can significantly improve Tesla's profitability moving forward, the analyst said. 

This business alone can help boost auto gross margins above sell-side projections, he said. 

"If software can become a large proportion of Tesla's revenues and profit (we estimate ~50% of gross profitability in a "blue sky" scenario) we believe investors will be willing to pay a higher multiple for Tesla's shares."

Although there are risks, Jonas said he believes investors should consider placing more emphasis on this opportunity moving forward.

TSLA Price Action

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Tesla shares were down 1.76% at $805.81 at the close Thursday. 

Related Links:

Tesla To Reduce Car Prices In North America And China

Why Tesla 'Appears To Be Turning The Corner' Heading Into Summer

Photo courtesy of Tesla. 

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Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsAdam JonasMorgan Stanley
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