Morgan Stanley gave Tesla (NASDAQ: TSLA) an overweight rating for the first time since 2017, and raised the price target to $540 from $360. This happened immediately after the announcement that the manufacturer was included in the S&P 500.
Analyst Adam Jonas 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.
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.
“Tesla has continued to develop its services/platform business to a level where we feel that it is appropriate for investors to consider to change how they model the company’s revenue and profit streams,” Jonas wrote.
“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,” he wrote in a note.
Jonas’ estimate now includes Tesla’s network services, energy storage, and insurance businesses. The analyst writes that the internet-of-cars opportunity is also real and is a prerequisite for further growth in the value of shares. “The internet-of-cars opportunity is real and, in our opinion, is a prerequisite to unlock further upside to the stock.”
This price increase follows immediately after it was announced two days ago that Tesla would be included in the S&P 500 index on December 21st. With five profitable quarters, Tesla already met the requirements for inclusion into the S&P 500 after the Q3 2020 earnings report, which requires that a company’s last four quarters in summation are profitable and that the previous quarter is profitable.
Basically, Jonas raised the target price based on what Tesla investors and many analysts have long known and acted upon. The problem for Wall Street analysts is that they are not able to adequately assess Tesla, since they are not specialists in the areas in which the company develops and operates.