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Tesla FSD Package Will Bring Significant Software Revenue To The Company

by Eva Fox May 29, 2020

Tesla FSD Package Will Bring Significant Software Revenue To The Company

Featured image: the_tesla_model_y/Instagram

Morgan Stanley analyst believes that Tesla could become even more successful if it expands its business model to generate revenue from software.

Morgan Stanley analyst Adam Jonas wrote in a note to investors that diverting Tesla's business model from selling cars to generating high-return recurring software revenue is key to unlocking more optimistic scenarios for an electric car company.

Tesla's Full-Self Driving (FSD) is an advanced driver assistance system, which the company now selling as a software package on its vehicles for $7,000, while Autopilot is part of all vehicles. Come July 1, Tesla's FSD will cost $8,000 due to a $1,000 price rise announced by Tesla CEO Elon Musk on Twitter few days ago.

Source: Tesla

Jonas wrote that FSD is a highly profitable revenue stream even now, but the attach rates are just over a quarter of the vehicles sold. Tesla's revenue from software and services is less than 5%.

According to the analyst, expanding the business can significantly increase Tesla's profitability in the future. He believes that this business alone can help boost auto gross margins above sell-side projections.

"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."

Jonas said that despite the risks, investors should consider this opportunity in more detail and pay more attention to it in the future.

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