Will Tesla Be On S&P 500? Tesla’s Software Has One Clue

by Trefis Team
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As a leader in autonomous driving, we estimate that Tesla (NASDAQ:TSLA) recorded $1.4 billion in Software Revenue in 2019 via sales of its Full Self Driving software upgrades. These upgrades, which cost about $8,000 per vehicle currently, are also highly lucrative. So How Do Tesla’s Software Upgrades Impact Its Margins? We estimate that they contributed about 400 basis points (4%) to Tesla’s Automotive Gross Margins (revenues less direct costs, divided by revenues) of 21% in 2019. Excluding software sales, Tesla is unlikely to have been profitable over the last few quarters. No discussion about S&P inclusion.

How Do Software Sales Impact Tesla’s Margins?

  • Tesla delivered about 368k vehicles in 2019, and we estimate that about 57% of customers opted for the self-driving software package. (90% of Model X & S buyers and 50% of Model 3 buyers). This translates into about 209k packages sold.
  • Assuming an average selling price of $6,500 on software upgrades, this translates into about $1.4 billion in Software Revenue in 2019.
  • Tesla’s reported Automotive gross profits, which include software sales as well as vehicle sales, stood at about $4.4 billion in 2019. With Automotive revenues standing at about $21 billion in 2019, this translates into Automotive gross margins of about 21%.
  • Assuming gross margins of about 80% on software, software gross profits would have stood at $1.1 billion in 2019. While software companies typically have gross margins of about 72%, we assume that the number is a little higher for Tesla.
  • Subtracting out software-related Revenue and Gross Profit from Automotive Revenue and Gross Profit, we estimate that Automotive Gross Margins would have stood at about 17% in 2019. Detailed calculations are available in our dashboard How Do Tesla’s Software Sales Impact Its Gross Margins?
  • This means that software sales contributed roughly 400 bps to Tesla’s automotive gross margins in 2019.

Why Software Could Account For A Higher Mix of Margins Going Forward

  • As Tesla’s deliveries rise, with the scaling up of new vehicles such as the Model Y, software sales will also grow.
  • Moreover, the capabilities of the self-driving system are improving and this could improve attach rates. CEO Elon Musk recently said that Tesla is ‘very close’ to achieving Level 5 self-driving technology – which means that human intervention won’t be required at all.
  • Tesla has also been steadily increasing prices on the software. Prices rose from $7,000 to $8,000 starting July 1, and the company has indicated that prices could only keep inching upward going forward as capabilities are added.
  • Tesla is toying with the idea of offering its self-driving software as a subscription service – a move that could boost recurring revenue streams for the company while potentially increasing the adoption of the package.

Is this a good time to jump into Tesla stock? Yes – especially if you believe in this one important Tesla metricTesla’s Time HorizonOn the flip side, for a more balanced, risk-adjusted view see our analysis Tesla Valuation: Jump Into Tesla, Wait, Or Get Out?

Separately, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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