A New Analyst Call Adds to Tesla's Luster

All through 2019, Morgan Stanley analyst Adam Jonas rated shares of Tesla Inc. (NASDAQ: TSLA) as the equivalent of Hold. Then in January, Jonas downgraded the stock to the equivalent of Sell and raised its price target from $250 to $360 (pre-split).

The firm raised its rating on Tesla back to Hold in August just a week or so before Tesla announced a five-for-one stock split. Jonas also put a price target of $1,050 on the stock.

On Wednesday morning, Morgan Stanley and Jonas upgraded their rating on Tesla from Equal Weight (Hold) to Overweight (Buy), the last time since October 2018 when shares traded at around $270 that Jonas had a Buy rating on the stock. Jonas also raised his price target on the stock from $360 to $540, a premium of around 18% to a recent price of around $456.

Tesla’s inclusion in the S&P 500 index did not figure into Morgan Stanley’s calculation. Rather, Jonas is bullish on Tesla’s ability to generate “high-margin, recurring software and services revenue” going forward. The market for these services is much larger than the market for electric cars.

MarketWatch cites Jonas’s argument: “To only value Tesla on car sales alone ignores the multiple businesses embedded within the company, and ignores the long-term value creation arising from monetizing Tesla’s core strengths, driven by best-in-class software and ancillary services.” Jonas figures that by 2030, services revenue could increase from around 1% to 2% of total revenue to as much as 20% of annual earnings before interest, taxes, depreciation and amortization.

Last month, analysts Gene Munster and David Stokman of Loup Ventures specified some other services that could boost Tesla’s revenue. The driving data the company receives from the vehicles, for example, could provide cheaper auto insurance for auto owners. A logistics service based around Tesla’s coming semi truck could lead to a logistics business, and Tesla’s battery business could be expanded to include a variety of products (HVAC equipment, for example) that other automakers don’t do.

Tesla’s announced entry into the S&P 500 gave the stock a boost of around 8.2% on Tuesday, and the Morgan Stanley upgrade has helped the shares add around 3% more on Wednesday. Shares traded at around $455.50 in the late morning, in a 52-week range of $65.42 to $502.49. The price target on the stock is $348.07, not including the new Morgan Stanley target.