Tesla Racing Towards “App Store Moment” with Self-Driving Tech

Samantha Miller

Tesla has disrupted the auto industry by making attractive, mass-market electric vehicles. Early investors have been richly rewarded as the stock has soared. But future gains for Tesla may be driven more by software revenues and less by vehicle sales, according to analysts.

The Apple Model

Morgan Stanley analyst Adam Jonas wrote in a report this week that Tesla needs to transition to a more “capital-light” business model that relies on highly profitable software and services revenues, much like Apple has done.

Apple created disruptive hardware products like the iPod, iPhone and iPad. But over time, it has shifted towards making more money from software and services like the App Store.

Jonas believes Tesla has achieved its “iPhone moment” with groundbreaking vehicles like the Model S and Model 3. Now it needs to reach its “App Store moment” by boosting recurring software revenues.

Key Role of Self-Driving Software

The most important software “app” for Tesla’s future is its autonomous driving technology. Tesla currently sells access to its driver assistance features for $199 per month.

The company’s goal is to develop this into fully self-driving software that could unlock massive new revenue streams from robotaxi services and licensing to other automakers.

Having mature self-driving technology would allow Tesla to offer its software as a service to other car companies. This would create a valuable new software licensing business within its traditional manufacturing operations.

Huge Market for Self-Driving Software

The market potential for autonomous driving software is massive. Morgan Stanley estimates it could be worth $2 trillion by 2030.

If Tesla can turn its current driver assistance features into fully autonomous robotaxi software, it can tap into this enormous opportunity.

The availability of self-driving software would also boost demand for Tesla’s monthly driver assistance subscription service. More consumers may be willing to pay $199 per month for software that can truly drive the car autonomously.

“While Tesla may have achieved its iPhone moment, it has yet to reach the App Store moment which is critical to unlocking high margin, high [valuation] multiple, highly recurring revenue,” Jonas explained.

Robotaxis and Licensing

Self-driving capability would allow Tesla to operate its own fleet of robotaxis. This could prove even more profitable than selling vehicles to consumers.

Morgan Stanley estimates Tesla could generate over $500,000 in profit over the lifetime of a robotaxi. That’s versus around $30,000 for selling a vehicle to a consumer.

“Robotaxis could contribute several hundred thousand dollars in high-margin recurring software revenue over the life of the vehicle,” Jonas stated.

Fully autonomous driving would also let Tesla license its software as a service to traditional automakers. This “Tesla Inside” model could become a huge new revenue stream.

RBC Capital analyst Tom Narayan told Barron’s that Tesla’s ability to become a supplier of self-driving software is where most of the remaining upside lies for the stock.

Software Focus Key for Future Growth

In summary, analysts see Tesla’s future growth being driven by software revenues as much as vehicle sales.

Autonomous driving technology can unlock new profit centers through robotaxi services, software licensing, and increased subscription revenues.

If Tesla pulls off the transition from being mainly a hardware company to more of a software and services firm, it could support much higher valuations. The recurring high-margin revenues would merit premium app-style multiples.

But it all hinges on making major progress towards true self-driving capability. That breakthrough would pave the way for Tesla to evolve into more of a software/technology company.

Jonas believes this “App Store moment” will be critical for powering Tesla’s stock higher from today’s elevated levels. So investors will be closely monitoring the rollout of enhanced autonomous features.

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Samantha Miller is a business and finance journalist with over 10 years of experience covering the latest news and trends shaping the corporate landscape. She began her career at The Wall Street Journal, where she reported on major companies and industry developments. Now, Samantha serve as a senior business writer for Modernagebank.com, profiling influential executives and providing in-depth analysis on business and financial topics.
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