Morgan Stanley says Tesla will surge 22% from current levels in its first bullish call on the stock since 2017

Tesla Model S
  • Tesla traded higher on Wednesday after Morgan Stanley upgraded the electric-vehicle manufacturer to "overweight" from "equal weight" for the first time since 2017.
  • Morgan Stanley said it sees a budding opportunity in Tesla's high-margin software-and-services business, which it expects to represent up to 20% of total profit by 2030.
  • "To only value Tesla on car sales alone ignores the multiple businesses embedded within the company, and ignores the long term value creation arising from monetizing Tesla's core strengths," Morgan Stanley said.
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The upside potential in Tesla remains strong, Morgan Stanley said in a Wednesday note.

For the first time since 2017, the firm turned bullish on the electric-car maker, upgrading Tesla to "overweight" from "equal weight" and assigning a $540 price target, representing potential upside of 22% from Tuesday's close.

In its bull-case scenario, Morgan Stanley assigned a price target of $1,068, representing potential upside of 142% from Tuesday's close.

A bulk of the upgrade derives from Morgan Stanley's inclusion of Tesla's services revenue in its valuation model. Morgan Stanley now expects Tesla's services business to represent 6% of revenue and 20% of profit by 2030.

Morgan Stanley said Tesla could benefit from a knock-on effect, in which Tesla's first-mover advantage in the electric-vehicle space allows it to better scale and lower costs, which then enables it to expand its user base, which then gives it an opportunity to better capitalize on its software business with its growing user base.

Read more: MORGAN STANLEY: Buy these 21 stocks set to soar at least 50% as their earnings rebound from a COVID-induced rout

The bank's key message to Tesla skeptics is that the electric-car company should not be valued on vehicle sales alone.

"To only value Tesla on car sales alone ignores the multiple businesses embedded within the company, and ignores the long term value creation arising from monetizing Tesla's core strengths, driven by best in class software and ancillary services," the note said.

Morgan Stanley's sum-of-the-parts analysis is divided into six distinct businesses:

  • Tesla Auto: valued at $254 a share, assuming 3.8 million annual unit sales by 2030.
  • Tesla Energy: includes the solar and storage businesses and is valued at $12 a share.
  • Tesla Insurance: a relatively new offering from the company that is valued at $15 a share.
  • Tesla Mobility/Ride-sharing: a business that has not officially launched yet but is valued at $38 a share.
  • Tesla Network Services: includes software upgrades like full-self-driving mode and is valued at $164 a share.
  • Tesla as a third-party supplier: involves supplying parts to other electric-auto manufacturers and is valued at $58 a share.

"Tesla has long been seen as a sum of the parts story given its mix of businesses across a number of business lines spanning from transportation, solar power generation and energy storage," Morgan Stanley said.

Shares of Tesla traded up as much as 10% on Wednesday. Year-to-date, Tesla is up 428%.

Read more: A 28-year-old hedge fund co-investing chief shares how he advanced from community college to Wall Street — and broke down his two-pronged approach to managing the fund's volatility strategies

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