Tesla could become one of the most valuable software companies, UBS says

Published Wed, Mar 3 20218:31 AM EST

Tesla 's leadership position in the electric vehicle space could help it become one of the most valuable software companies, according to UBS. The firm said that while legacy automakers can challenge Tesla in terms of both electric vehicle volume as well as cost-efficient scalable platforms, Elon Musk's company will dominate the software space. UBS values the autonomous vehicle market at more than $1 trillion. "Software is likely the next battleground in the global car industry, and no other carmaker is closer to monetize fully autonomous driving for everyday use, and the scalability of Tesla's technology creates the biggest software-driven revenue opportunity in the industry," the firm's analysts led by Patrick Hummel said. Hummel more than doubled his target on the stock, and now sees Tesla hitting $730, which is roughly 6% higher than Tuesday's closing price. UBS' old target stood at $325. Still, many unknown variables remain, and UBS reiterated its neutral rating on the company. The firm's base case view is that Tesla will be the joint leader in electric vehicle volume — tied with Volkswagen — but Tesla will be the most profitable automaker thanks to its software monetization opportunity. Hummel sees Tesla generating $20 billion in operating profit by 2025, with $9 billion of that coming from software — mainly from full self-driving software. This year Tesla earned less than $1 billion from software. A dedicated robo-taxi fleet in the future could further boost Tesla's software revenue. In addition to full self-driving options for passenger vehicles, software services also include in-car media and gaming, as well as subscription services and insurance. A company's software cost decreases with the number of units deployed, meaning that it only makes sense for the largest automakers to develop in-house options. "The total software revenue pool is bigger than the size of the global car sales revenue pool by 2030 ... those who control the software could generate up to $54k additional revenues per car, and this is an annual recurring number," Hummel noted. In order to gauge Tesla's potential software opportunity, UBS' auto analysts teamed up with the firm's software research team. The firm compared Tesla's software potential to that of Salesforce , Nvidia , Alphabet , Adobe and the cloud services divisions of Microsoft and Amazon . Of course, these companies already derive billions year to year from software while Tesla's opportunity is wholly in the future. Still, the firm found that the auto market represents an ever larger opportunity. "Valuing Tesla's software opportunity is a bigger, higher-risk bet on the future, but the potential is even bigger than the TAM of most software companies," the firm said, referring to total addressable market. Despite this bullish view, UBS reiterated that "uncertainty is high." Risks include Tesla losing market share, as well as low investor interest in paying for the autonomous vehicle software bet upfront. Shares of Tesla advanced 1.5% during premarket trading on Wednesday. - CNBC's Michael Bloom contributed reporting.

Tesla China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai, China January 7, 2020.

Aly Song | Reuters

Tesla's leadership position in the electric vehicle space could help it become one of the most valuable software companies, according to UBS.

The firm said that while legacy automakers can challenge Tesla in terms of both electric vehicle volume as well as cost-efficient scalable platforms, Elon Musk's company will dominate the software space. UBS values the autonomous vehicle market at more than $1 trillion.