Tesla's Big Advantage Over Legacy Automakers? Software, Says Munster

Tesla Inc TSLA enjoys an advantage over legacy automakers which is both clear and profitable, Loup Ventures Managing Partner Gene Munster said in a note Monday.

The Numbers: Munster estimates the electric vehicle maker will recognize $1.1 billion in deferred software revenue in 2021 from its Supercharger network, internet connectivity, and full self-driving (FSD) features and over-the-air (OTA) software updates. The number will increase to $1.5 billion in 2022. In the current calendar year, the automaker expects to recognize $751 million in deferred revenue, it said in a 10-K filing in 2019.

Comparing the numbers with legacy automakers, Munster took stock of General Motors Company’s GM operating income in 2019, which stood at $5.4 billion, and Ford Motor Company’s F, which was $574 million. 

“Tesla’s deferred revenue next year can account for about 20% of GM’s operating income today and 200% of Ford’s,” the Loup Ventures analyst wrote.

FSD, Driver Of Revenues: Munster is of the opinion that FSD is the driver of revenues for the Elon Musk-led automaker. The analyst assumes that both revenue and vehicle deliveries will grow by 40% annually. 

“As FSD gets closer to full autonomy and users find it more valuable, we believe the attach rate will increase, as well as the price,” explained Munster. The average selling price for FSD is $8,500 in 2020 and the attach rate is 35%. This is slated to go up to $10,000 and 37.5%, respectively, by 2021 and to 40% and $11,000 in 2022.

Munster thinks the deferred revenue reporting is not a short-term phenomenon. 

“We disagree and think that FSD is a journey, not a destination, and that there will be a deferred revenue factor into perpetuity,” the analyst claimed. 

Tesla’s OTA Advantage: Tesla has a multi-year lead over traditional auto in OTA software updates and that puts the latter in a “tight spot,” wrote Munster.

Munster pointed out the release of Tesla’s Full Self-Driving Beta as evidence of the company’s prowess in the OTA area.

The analyst had said earlier in the month that Tesla stock could shoot up to $2,500 in three years but Apple Inc AAPL could offer the EV firm competition if it entered the same segment.

OTA Report Card: The analyst compared various legacy automakers against Tesla in terms of OTA and published a report card of their progress. While the Palo Alto-based automaker got an “A,” others such as Bayerische Motoren Werke AG BMWYY, GM, Volkswagen AG VWAGY were graded “C+” or “C.”

Ford and Daimler AG DDAIF owned Mercedes-Benz were assigned a “D” grade by Munster while Asian automakers such as Hyundai Motor Company HYMTF, Honda Motor Co, Ltd HMC, and Toyota Motor Corporation TM got an “F.”

Price Action: Tesla shares closed nearly 4.9% higher at $639.83 on Monday and fell 0.6% in the after-hours session.

See Also: Tesla Gets Jefferies Downgrade As EV Maker Faces 'Execution Risk' In 2021

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