Tesla Has A Software Business And It’s Big!

A Tesla vehicle is shown charging at a Tesla Supercharger site in Charlotte, N.C., Friday, July 19, 2019. (AP Photo/Chuck Burton) photocredit: ASSOCIATED PRESS

Tesla (NASDAQ: TSLA) has been a pioneer of sorts in the self-driving space and we believe that the company is on track to sell close to $1.5 billion in self-driving software this year. Tesla currently sells its Full Self-Driving Capability as an optional software add-on for its vehicles, priced at $6,000 if opted for before delivery. The FSD update enables automatic driving, lane-changes, automatic parking, and summon features (your parked car will find you!) on Tesla cars. In this analysis, we estimate Tesla’s total add-on software sales over the next three years and also take a look at how the company’s software business compares to the broader auto industry.

1. Estimating Tesla’s Total Add-On Software Revenues

1.1 Estimating Model 3s Sold With FSD

  • We estimate that about half of Model 3 buyers will opt for the FSD package.
  • Assuming Model 3 sales of 300k and 500k respectively in 2019 and 2021, this would translate into 150k and 250k Model 3 vehicles sold with FSD over 2019 and 2021.

1.2 Estimating Model S & X Sold With FSD

  • As the Model S & X target a more premium segment, we expect the attach rate for FSD to be much higher at 90%.
  • This translates into 80k Model S/X vehicles with FSD in 2019 and 90k in 2021, assuming a total of 90k and 100k S/X deliveries over 2019 and 2021.

1.3 Estimating Tesla’s Total Revenues From Self-Driving Software

  • The FSD upgrade costs $6k if ordered before delivery and $8k, if ordered after. As we assume that a bulk of the adds will be prior, we take an average price of $6.5k for 2019.
  • As CEO Elon Musk has indicated that Tesla could increase the price of the software significantly over time, we estimate pricing of $7.5k for 2020/21.
  • Multiplying this by the total FSD upgrades sold for the Model 3, S and X, we estimate that related revenues will stand at $1.5 billion in 2019 and $2.5 billion in 2021.

1.4 Self-Driving Software Sales As % Total Revenues Could Grow From 6% In 2018 To Almost 8% By 2021

  • We estimate that Self-driving software sales as % of total Tesla revenues could grow from 6.1% in 2019 to about 7.6% in 2021.

2.Tesla Is Well Ahead Of the Broader Industry In Terms Of Software Content Per Vehicle

  • Per an analysis by McKinsey, the average software content per D-segment, or large cars, stands at approximately $1,220 or 10% of a car’s value.
  • With its optional self-driving software itself priced at $6k per unit, Tesla is well ahead of the broader industry in terms of software content.
  • The mix of software as a % of total vehicle content is likely to grow from 10% to 30% by 2030 per McKinsey.

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