Tesla has started to indicate that it is going to expand its software offering, including a subscription to its full self-driving package, and analysts are starting to consider this new revenue stream as a massive opportunity.
Over the last year, Tesla has made several moves to start generating revenue from software.
The automaker started charging $10 a month for its ‘premium connectivity’ features.
Tesla also started selling software features through its mobile app.
But the most important move Tesla is making to create revenue from software is selling its Full Self-Driving Package and recently, Tesla even announced that it will offer its Full Self-Driving Package as a subscription service, which could be considered software-as-a-service (SaaS).
CEO Elon Musk said during Tesla’s last earnings call:
“I think we will offer Full Self-Driving as a subscription service, but it will be probably towards the end of this year.”
Morgan Stanley has been exploring the impact of the Full Self-Driving Package on Tesla’s business model in a note to clients last week.
The firm wrote:
“Tesla is the only company today, to the best of our knowledge, that is fully monetizing its autonomous driving assets at scale. This can potentially provide a large competitive advantage from both a consumer value proposition perspective and technological advancement perspective, given the large amounts of data that Tesla is able to collect from its vehicle fleet vs. the traditional OEMs.”
Morgan Stanley believes that only 27% of Tesla buyers are currently buying the $7,000 Full Self-Driving package and that a subscription service, which is expected to cost more than $100 per month, would expand the take rate of the package.
The firm believes that it could have a major impact on Tesla’s business:
“In speaking with our IT hardware and internet analysts, it became clear that the market’s appreciation of an emerging business or revenue stream can inflect when we approach 15 or 20% of company revenue and 25 to 30% of profit. In the case of Tesla, our model suggests that Autopilot/full self-driving (FSD) revenue can reach only 6% of sales by 2025, but nearly 25% of gross profit. We believe this would be extremely meaningful for a company whose core business is automotive sales.”
Morgan Stanley doesn’t currently account for this potential change in its price target for TSLA, but it did explore how a 400bps increase in auto gross margin due to FSD could impact the share price:
“If we take our estimated 2025E gross profit of ~$24BN, that implies an estimated EBITDA of $18.2BN. At an estimated 0.5x premium to the current MSe 2025E EV/EBITDA, that would imply a share price of roughly $1,150, just below our current bull case valuation of $1,200. To arrive at higher per share values, one would have to assume either higher attach rates, higher FSD prices, a higher multiple, or some combination of the three. For example if we shift the timeline of our “blue sky” scenario up 5 years to 2025 at a 17x EV/EBITDA multiple, we arrive at a roughly $2,000 per share value.”
However, the firm believes “there are many risks to achieving such a scenario” including regulations, the take rate being affected by expansion in other countries, and others.
I think this will be a massive business for Tesla.
You don’t have to look too deep to understand why. First off, you have to consider people leasing Tesla vehicles.
That’s basically what the subscription service would offer.
Currently, adding FSD to a Tesla lease adds about $100 to your monthly payment. It’s harder to justify since Tesla claims that the FSD package would gain in value with increased pricing.
With the way the features under FSD have been improving this year, I can see the take rate increase to 30-40% by the end of the year combined with the new subscription service.
The great thing with the subscription service is that you can try it for a month and if you don’t see the value in it, you can unsubscribe.
Although Tesla has been offering trials with a similar scheme before, it’s a lot easier to pull the trigger on a monthly payment for a service at the end of the trial than take $7,000 out of your pocket.
What do you think? Let us know in the comment section below.
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