BUSINESS

Morgan Stanley Hikes Tesla Stock Price Target On Driverless Car Potential

08/17/2015 03:14 EDT | Updated 08/17/2016 05:59 EDT
An analyst with Morgan Stanley says the stock price of electric car maker Tesla could soon be worth almost twice as much as it is now largely because of the potential of self-driving cars that consumers can rent on demand, like Uber.

In a research note to clients Monday, Adam Jonas raised his target price for Tesla shares to $465 US. That's more that 66 per cent above his old target of $280 and well above the $243 level the stock closed at on Friday.

Ride-sharing app?

Jonas' main reason for optimism is a business segment that the company doesn't even do yet, which is a ride-sharing service using driverless cars.

Worldwide, humans drive more than 16 trillion kilometres every year, most of which is done in cars made by "companies practicing a 100-year-old business model of human-driven, privately owned, internal-combustion vehicles," Jonas said. "This is fundamentally changing."

Tesla is a leader in the electric car world, but sells just a fraction of the hundreds of millions of cars that major gasoline-powered players like GM, Toyota and Volkswagen sell every year. While the company says it is on track to sellimg a million cars a year within the next decade, it is still a far cry off from the leaders.

Self-driving cars soon

But Tesla has an advantage in a business area it hasn't even entered into yet, Jonas says, which is self-driving cars in an on-demand mobility service. Jonas' idea would see a new business that works a bit like ride-sharing app Uber, but entirely populated by self-driving Teslas.

He calls the division "Tesla Mobility" and unlike conventional cars, Teslas today already have a leg-up in autonomous driving because their vehicles are fully electric, wirelessly connected to each other and can "learn" on the go via software updates. "No other established automaker can claim this today," he said, which makes it a lot easier for the company to roll out a self-driving vehicle than for other companies to do so.

Jonas expects the entire car business to shift away from the current owner-operator model and toward an autonomous future in which people are driven around by robots in vehicles they can access only when they need them.

Instead of selling cars to ridesharing companies, Tesla could theoretically take out the middle man and sell the service directly to customers themselves.

"We view this business opportunity as potentially additive to Tesla's existing model of selling human-driven cars to private owners and see potential for this model to conceivably more than triple the company's potential revenues by 2029," Jonas' says.

Although the company officially has no plans to do something similar to the "Tesla Mobility" unit that Jonas' envisions, the analyst " we would be surprised if Tesla did not share formalized business plans on shared mobility within the next 12 to 18 months." The first driverless on-demand Teslas would then hit the road some time in 2018, he said.

If it happens, it's an idea that could be worth billions. Jonas comes up with his $465 price target because it's the midpoint between the base case assumption that the shares could be worth $319 if the business stays as it is, but as much as $611 a share if these new revenue streams come to pass.

The car company, as it stands now. is worth about $280 per share, Jonas' says, with the recently announced battery division adding as much as $39 per share. But Jonas' optimistic take is that the battery unit increases to $87 a share, along with $244 a share for the as yet non-existent ride-sharing unit, on top of the core electric car business.

"If Tesla wants to make good on its mission to accelerate the world's transition to sustainable transport, we see the move to a shared mobility model as critical," Jonas said.

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