Slowly but surely, the world is coming to the realization that an investment in Tesla (NASDAQ: TSLA) is no longer just an investment in an electric vehicle company.
On Sept. 11, Morgan Stanley analyst Adam Jonas boosted his price target for Tesla by 60% from its previous $250 -- near where it closed on the previous trading day -- to $400 a share. His reason for doing so has to do with one crucial technological development that will drive the company's long-term value proposition -- Tesla's supercomputer, Dojo.
Developed in-house by Tesla engineers, Dojo is one of the most sophisticated and powerful computers on Earth. Comprised of thousands of general processing units (GPU), the supercomputer holds the potential to revolutionize Tesla's business and revenue streams.
According to Jonas, the development of Dojo is why it's time for investors to view Tesla as an auto company and a tech company at the forefront of harnessing the power of artificial intelligence (AI). As Jonas put it, "We believe Dojo can represent the next step-change in market perception of Tesla."
In the wake of Jonas' upgrade, Tesla stock has gained ground, but as of Friday morning, getting to a $400 share price would still require an increase of about 45%.
Enter the Dojo
A 45% increase from Tesla's current price sounds nice, but how would Dojo get it there? First and foremost, Jonas and fellow analysts believe the supercomputer will help Tesla develop its full self-driving (FSD) software much faster and more efficiently.
In the updated Morgan Stanley report, Jonas presumes that the chips Dojo uses provide up to six times better performance than current GPUs on the market and significantly cut energy use since they will need less cooling. Add it all up, and Dojo could offer Tesla cost savings totaling nearly $6.5 billion over the next few years.
With a more capable and efficient in-house computing solution, Tesla can process the millions of miles of driving data its vehicles collect, and use that data to train its AI-powered neural networks to teach cars how to drive on their own. Attainment of the coveted Level 4 or 5 autonomy is the ultimate goal. At this point, Tesla plans to start a robotaxi business, an opportunity CEO Elon Musk expects to hold "quasi-infinite demand."
Furthermore, Jonas estimates that Tesla's more refined FSD software has the potential to generate upwards of $100 billion in operating income for the company by licensing it to other automakers who want to add autonomous driving capabilities to their vehicles.
The real game changer
While a self-driving taxi service and licensed FSD software would undoubtedly boost Tesla's revenue, the real opportunity Dojo creates for the company is the development of a software-as-a-service (SaaS) product. Jonas drew comparisons to Amazon's popular cloud computing platform provider, Amazon Web Services (AWS), to quantify just how transformative Dojo could be.
Today, AWS generates 70% of Amazon's total earnings before interest and taxes, and Jonas predicts a similar future could unfold for Tesla. By offering Dojo as a cloud supercomputer that other companies could use to optimize their AI models (and by charging them hefty fees for that service), Tesla could bolster its profits. Moreover, demand for Dojo could range well beyond the automotive industry. Morgan Stanley believes Tesla's supercomputer could help companies implement visually trained AI models similar to its FSD software in sectors such as manufacturing, aviation, healthcare, utilities, and security.
When considering the combination of the eventual creation of a robotaxi business, the potential revenues from licensing FSD to other automakers, and Dojo's potential as a SaaS product, Jonas foresees a possible increase of up to $500 billion to Tesla's market value, a move that would send the company's valuation past $1 trillion.
Admittedly, these estimates remain speculative, but many indicators point toward Tesla reaching these heights. When Musk said two years ago that Tesla would be developing its own supercomputer, many critics brushed off the announcement. However, in July of this year, Dojo became the world's third most powerful supercomputer, and Musk plans to make it number one.
As the growth of Dojo and the improvement of its AI capabilities continue, Tesla will be a portfolio leader for years to come. Most importantly, investors have a chance to get ahead of the game here, as the market still seems to view Tesla as just an electric vehicle manufacturer.
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