Morgan Stanley analyst Adam Jones on Wednesday raised Tesla to overweight for the first time in more than three years, predicting that the electric carmaker is on the verge of a “profound model shift” from selling cars to generating high-margin software and services revenue.
“To only value Tesla on car sales alone ignores the multiple businesses embedded within the company,” Jones said in a research note to clients as he upgraded the shares from equal-weight and raised his price target by 50% to $540 from $360, suggesting 22% additional upside for the stock.
Tesla shares were up 10.34% at $487.26 in afternoon trading on Wednesday.
In his note, Jones wrote that Tesla is “on the verge of a profound model shift” from selling cars to generating high margin, recurring software and services revenue, and that its electric vehicle business is Tesla's and CEO Elon Musk's “entry ticket” for “unlocking much larger” potential markets.
To better gauge Tesla’s future earnings potential, Jones said his team was now including software/connected vehicle services revenue in their earnings and valuation forecasts. With the total number of Tesla’s out in the world expected to reach 2.1 million next year, “a more in-depth understanding of the revenue streams derived from each car is warranted right now,” he wrote.
Morgan Stanley’s Tesla U-turn follows Standard & Poor’s announcement Tuesday that the electric carmaker will join the S&P 500 on Dec. 21, a move that had been anticipated for months as Tesla has surprised Wall Street with better-than-expected earnings and sales, which in turn has driven its valuation to new heights.
Tesla will be one of the most valuable companies in the S&P 500 once it's included.
It also follows the success of Musk's other multi-billion-dollar endeavor, SpaceX.
NASA and SpaceX made a successful lift off on Sunday evening of a spacecraft carrying astronauts from the U.S. and Japan for travel to the International Space Station - marking the start of a major space mission that's been years in the making.
To be sure, Tesla isn't the only EV game in town, at least not anymore. Chinese electric carmaker NIO (NIO) - Get NIO Inc. (China) Report posted better-than-expected results after the close Tuesday, and said it expects to deliver 16,500 to 17,000 vehicles in the coming quarter.