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Tesla
disrupted the car business by selling attractive electric vehicles for the mass market, and made early investors rich. Future stock gains may be more about the software, and less about EVs themselves.
“Core to our [Buy] thesis is the ability for Tesla to move the needle incrementally toward more capital-light models and incrementally away from the auto business,” wrote Morgan Stanley analyst Adam Jonas in a Monday report.
In other words, he wants Tesla (ticker: TSLA) to be more like
Apple
(AAPL) and less like
Ford Motor
(F).
Apple created the Mac, iPod, iPhone, and iPad. Hardware items that disrupted industries. Then Apple created the App store and shifted more toward software and services. Tesla has the hardware—now it needs more software-related sales.
“While Tesla may have achieved its iPhone moment, it has yet to reach the App Store moment which is critical to unlocking high margin, high [valuation] multiple, highly recurring revenue,” added Jonas.
The most important “app” for Tesla is the driver-assistance software that the company sells today for $199 a month. The goal for driver-assistance software is to morph into truly self-driving software that will open up robotaxi business to Tesla and boost the number of people willing to pay $199 a month for the product.
Creating truly self-driving cars will also allow the company to license its software to other auto makers, creating a supply business within a traditional assembly business.
Jonas’ view isn’t unique. RBC analyst Tom Narayan told Barron’s recently that most of the upside for Tesla stock lies in the company’s ability to morph into a supplier of self-driving software while, of course, still selling millions of cars a year.
Both analysts represent the current bull case for Tesla stock, and rate shares Buy. Narayan’s price target is $301, while Jonas’ target price is a Street-high $380, which values Tesla stock at about $1.2 trillion.
Jonas breaks his price target down by business. He values the car business at $84 a share, or about $270 billion. That’s close to what
Toyota Motor
(TM) stock is worth. He values supply, software, and services at $238 a share, or about $740 billion. Tesla also has a battery storage business and sells insurance.
Morgan’s Jonas is the most-bullish Tesla analyst on the Street. The average price target for Tesla stock is about $242, according to FactSet. Only 44% of analysts covering Tesla stock have Buy ratings. The average Buy-rating ratio for
S&P 500
stocks is about 55%.
The Street has some concerns. Jonas acknowledges them, too. He added in his note that Tesla needs to stop missing earnings estimates, and expand its vehicle lineup beyond its current four models: The S, X, 3, and Y.
In early trading Tuesday, Tesla stock was down 1% while the S&P 500 was up 0.2% and the
Nasdaq Composite
gained 0.7%. Tesla stock is underperforming, but it is still up about 7% over the past five trading days.
Write to Al Root at [email protected]
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