Morgan Stanley believes Tesla (TSLA) could end up making more money from selling software subscriptions than selling hardware, like its actual vehicles.
Tesla has been on a trend of offering paid services through software.
The automaker started charging $10 a month for its “premium connectivity” features.
Tesla also started selling software features in packages through its mobile app.
But now, Tesla is taking it to a whole new level with its recently launched Full Self-Driving monthly subscription for $199 per month.
Several analysts have been trying to value this side of Tesla’s business.
Adam Jonas, a Morgan Stanley analyst, has been early in trying to incorporate that in their model with a note about it last year.
Now that Tesla launched the FSD subscription, Morgan Stanley released a new note trying to value Tesla’s software-as-a-service business.
The $199 per month price tag was actually higher than Jonas anticipated:
“The monthly subscription upgrade fee of $199 is substantially higher than we would have expected. The $10k up front price for FSD implies around $56/month over a 15 year useful life of the vehicle (180 months). We have assumed Tesla derives $100/month of average revenue per unit (ARPU) per monthly active user (MAU) by 2026 or 2027 for 60pct of its vehicle parc. This estimate includes autonomy, connectivity, performance enhancements, charging, maintenance and other services.”
Tesla currently has a fleet of about 1.5 million vehicles, but Morgan Stanley is projecting that it will increase to 35-40 million by the end of the decade.
At that point, they believe that Tesla’s software business could be bigger than its hardware business:
“We believe it is possible that the value of Tesla’s recurring software revenue may exceed the value of its hardware business. Over time, we anticipate a wide ranging suite of services rolled out to Tesla users and increasing financial disclosure from the company to help transition analysis and stock coverage away from traditional auto analysts (on both the buy-side and sell-side) towards tech/platform analysts. In our opinion, this transition can help drive a further re-rating of the shares over time.”
However, Morgan Stanley didn’t update its $900 price target on Tesla’s stock price following the announcement.
This software-as-a-service trend at Tesla is definitely something to watch, but when it comes to Full Self-Driving, Tesla still needs to deliver.
As of now, the prices are difficult to justify.
The $199 Full Self-Driving subscription is one thing, but the $99 for Tesla owners with Enhanced Autopilot is hard to justify.
People buying the subscription right now are basically paying $99 per month for the “Traffic Light and Stop Sign Control” feature:
Just having the subscription is still going to improve the take-rate, but Tesla actually delivering a full self-driving system is the most important part, and the path to that happening is exactly clear.
What do you think of this development of Tesla’s software-as-a-service trend? Let us know in the comment section below.
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