Tesla’s stock (TSLA) is rising again today, and it can be partly attributed to Morgan Stanley turning positive on the stock over eyeing revenue from software services.
Morgan Stanley analyst Adam Jonas was an early fan of Tesla on Wall Street. He was even referred to as a “Tesla cheerleader” by some.
However, the analyst and his team at Morgan Stanley haven’t been positive on Tesla’s stock for years.
They haven’t recommended to buy Tesla’s stock since 2017.
As a matter of fact, if Tesla investors would have listened to Morgan Stanley, they would have missed the biggest run of Tesla’s stock over the last year:
But now Jonas is changing his tune and after the S&P500 decided to include Tesla in the indice, Morgan Stanley is now rating Tesla a “buy” again — or more accurately, an “overweight’ rating with a new price target of $540 a share, which represents a significant upside from the current price..
The price target increase is due to Morgan Stanley now accounting for the potential of Tesla’s software-as-a-service revenue:
We conservatively estimate Tesla’s Network Services business to account for between ~1-2% of revenue today, rising to over ~6% by 2030 by which time we forecast services to account for ~18-20% of total company EBITDA. This forecast assumes 12mm Monthly Active Users (MAUs) by 2030 (60% penetration of Tesla’s global fleet) at $100 monthly Average Revenue Per User (ARPU) and a 60% blended EBITDA margin. We value Tesla Network Services at $164 per Tesla share, accounting for ~91% of our Tesla price target increase to $540 from $360 previously. Given Network Services accounts for 18.9% of our group EBITDA by 2030, but accounts for 30% of our revised $540 price target, we are implying a substantially higher multiple for this business which is more akin to high growth SaaS comps than to mobility/tech hardware comps.
As we previously reported, there has been a trend lately of Tesla offering paid services through software.
The automaker started charging $10 a month for its “premium connectivity” features.
Tesla also started selling software features through its mobile app.
But the most important move Tesla is making to create revenue from software is selling 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 a significant potential for profit in that sector.
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