Tesla's FSD Package Shows Automaker's Potential For Software Revenue

Electric vehicle pioneer Tesla Inc TSLA could be even more successful if it pivots its business model to generating software revenue, according to a Morgan Stanley analyst. 

The Tesla Analyst

Adam Jonas has an Equal-weight rating on Tesla with a $680 price target. 

The Tesla Thesis

Pivoting Tesla's business model from selling cars to generating high-margin recurring software revenue is key to unlocking more bullish scenarios for the electric vehicle company, Jonas said in a Thursday note. (See his track record here.)

Tesla's full-self driving is an advanced driver assistance system, with the company now selling FSD as a software package on its vehicles for $7,000, while autopilot is part of all vehicles, the analyst said. 

FSD is a highly profitable revenue stream even now, but the attach rates are just over a quarter of the vehicles sold, he said.

Tesla's proportion of revenues from software and services is below 5%, Jonas said. 

Expanding the business can significantly improve Tesla's profitability moving forward, the analyst said. 

This business alone can help boost auto gross margins above sell-side projections, he said. 

"If software can become a large proportion of Tesla's revenues and profit (we estimate ~50% of gross profitability in a "blue sky" scenario) we believe investors will be willing to pay a higher multiple for Tesla's shares."

Although there are risks, Jonas said he believes investors should consider placing more emphasis on this opportunity moving forward.

TSLA Price Action

Tesla shares were down 1.76% at $805.81 at the close Thursday. 

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Photo courtesy of Tesla.