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Shares of Tesla (TSLA) are up again today and that can be partly attributed to Morgan Stanley turning positive on the stock from seeing revenue from software services.
Morgan Stanley analyst Adam Jonas was one of Tesla’s earliest fans on Wall Street. Some even called him “Tesla cheerleader”.
However, the analyst and his Morgan Stanley team haven’t been positive about Tesla’s stock in years.
They do not recommend buying Tesla stock since 2017.
As a matter of fact, if Tesla investors had listened to Morgan Stanley, they would have missed the biggest Tesla stock run in the past year:
But now Jonas is changing his tune and after the S & P500 decided to include Tesla in the index, Morgan Stanley is now pricing Tesla as a “buy” again – or more precisely, an “overweight” rating with a new price target. of $ 540 per share, which is a significant increase from the current price.
The increase in the target price is due to the fact that Morgan Stanley now represents Tesla’s software-as-a-service revenue potential:
We cautiously estimate Tesla’s network services business represents around 1-2% of revenue today, rising to over 6% by 2030, when we expect services to account for around 18-20% of total EBITDA. of the company. This prediction assumes 12mm monthly active users (MAUs) by 2030 (60% penetration of Tesla’s global fleet) with an average monthly revenue per user (ARPU) of $ 100 and a mixed EBITDA margin of 60%. We appreciate Tesla network services at $ 164 per Tesla share, which represents about 91% of the increase in our Tesla price target to $ 540 from $ 360 previously. Given that network services represent 18.9% of our group’s EBITDA by 2030, but represent 30% of our revised price target of $ 540, we are implying a substantially higher multiple for this business which is more similar to high-growth SaaS comps that to mobility / technology hardware components.
As we have previously reported, there has recently been a trend in which Tesla offers paid services via software.
The automaker has started charging $ 10 a month for its “premium connectivity” features.
Tesla has also started selling software features via its mobile app.
But the most important move Tesla is making to create revenue from software is the sale of its full self-driving package, and recently Tesla even announced that it will offer its full self-driving package as a subscription service, which could be considered. software-as-a-service (SaaS).
Morgan Stanley sees significant profit potential in that industry.
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