Tesla: Beyond the Electric Revolution

Tesla revolutionized the automotive industry with its appealing electric vehicles, propelling early investors to riches. However, the future of Tesla's stock gains lies not just in EVs themselves, but rather in the power of software.

According to Morgan Stanley analyst Adam Jonas, Tesla's potential lies in becoming more like Apple, shifting towards a capital-light model and moving away from being solely an auto business. Apple disrupted industries with its hardware creations such as the Mac, iPod, iPhone, and iPad before shifting focus towards software and services. Similarly, Tesla needs to capitalize on its hardware success by expanding its software-related sales.

While Tesla may have already made its mark with its groundbreaking vehicles, it has yet to reach its "App Store moment." This pivotal moment is crucial for unlocking high margins, a substantial valuation, and recurring revenue. To achieve this, Tesla must prioritize the development and commercialization of driver assistance software—an indispensable "app" within the Tesla ecosystem, currently available for $199 a month. The ultimate aim is for this software to evolve into fully autonomous driving technology, enabling Tesla to venture into the lucrative robotaxi business while simultaneously boosting demand for the product.

Furthermore, Tesla's mastery of self-driving cars will present an opportunity to license its software to other automakers. This expansion into the supply business within the traditional assembly industry ensures a diversified revenue stream for Tesla.

In essence, Tesla's future success hinges on its ability to transcend the electric revolution and harness the boundless potential of software. By emulating Apple's innovative shift towards software and services, Tesla can continue to disrupt and shape the automotive landscape while rewarding its investors.

Analysts Believe Tesla's Growth Lies in Self-Driving Software

Bullish Case for Tesla

Both Narayan and Jonas are optimistic about Tesla's future, rating its shares as a Buy. Narayan sets a price target of $301, while Jonas goes even higher with a target of $380, valuing Tesla stock at an impressive $1.2 trillion.

Breaking Down the Numbers

Jonas provides a breakdown of his price target, assigning a value of $84 per share (approximately $270 billion) to Tesla's car business. This valuation aligns closely with Toyota Motor (TM) stock. He then values Tesla's supply, software, and services at $238 per share (approximately $740 billion). In addition, Tesla's battery storage business and insurance sales further contribute to its overall value.

Most Bullish Analyst on the Street

Morgan Stanley's Jonas holds the title of being the most bullish analyst when it comes to Tesla stock. According to FactSet, the average price target for Tesla is around $242. Surprisingly, only 44% of analysts covering Tesla give it a Buy rating, compared to an average Buy-rating ratio of about 55% for S&P 500 stocks.

Addressing Concerns

Even with his bullish outlook, Jonas does acknowledge some concerns surrounding Tesla. One major concern is Tesla consistently missing earnings estimates. To overcome this, Jonas suggests that Tesla needs to not only meet expectations but also expand its vehicle lineup beyond the current four models: The S, X, 3, and Y.

Market Performance

During premarket trading, Tesla stock experienced a minor dip of 0.4%, while both S&P 500 and Nasdaq Composite futures were down approximately 0.3%.