CEO Elon Musk thinks Tesla’s new software update could be a “massive demand driver.”
Shares of Tesla (TSLA -12.34%) finished down 12% Wednesday following the release of the company’s second-quarter earnings results the previous afternoon. The EV specialist saw a recovery in vehicle sales, but the lower selling prices needed to stimulate demand pressured its profitability.
Piper Sandler doesn’t see the lower margins hurting Tesla in the long run, however. The investment bank maintained an overweight (buy) rating on the stock, but it also increased its price target from $205 to $300. This would imply 38% upside over Tesla’s current share price.
Let’s see how realistic that target is considering Tesla’s latest update.
Tesla’s software opportunity
Wall Street is highly sensitive to Tesla’s automotive margins given the heightened competition in the electric vehicle market right now. Lower margins led to a 43% year-over-year decline in the company’s adjusted earnings per share for the quarter.
But Piper Sandler believes there were other bright spots that could take the focus off Tesla’s weak margin performance, most notably positive comments regarding the latest version of its full self-driving software (FSD).
The recent rollout of version 12.5 significantly increased the performance of the autonomous driving capabilities of Tesla’s cars. In fact, CEO Elon Musk believes it will be a “massive demand driver.”
Tesla is focusing on communicating to customers what FSD can do when they deliver a new vehicle to a buyer. It’s not just about selling more vehicles but generating recurring revenue from FSD subscriptions that can boost margins. Tesla offers FSD as an optional feature that costs $99 per month.
Is the stock headed for $300?
For Tesla stock to reach $300, investors would obviously have to determine that it’s worth a higher valuation. Its current price-to-sales (P/S) multiple is 8. It traded as high as 30 times revenue in 2021, when revenue and profits were soaring.
However, unless Tesla reports positive trends in automotive margin in its Q3 earnings report, the stock’s gains may remain limited in the near term.
