Wall Street darling Tesla is holding on to its recent gains today on the back of a bullish analyst report, despite some weakness in tech shares.

Tesla has seen its value skyrocket in recent quarters, rising from a 52-week low share price of $211 to $1,548.81 today. That figure, however, is low in the eyes of some. Enter Piper Sandler.

The Piper analyst report, which was first released late Monday, gives Tesla a new price target of $2,322, up from the group’s prior price target of a little over $900 per share. The stock still has room to run, some believe, perhaps explaining some of the mania that related companies have seen in recent weeks, including fellow electric car manufacturers Nikola, Nio and others.

It was enough to prompt a “wow” from Tesla CEO Elon Musk via a tweet Monday evening.

The Piper report cites two key factors for its new Tesla price target: The company’s edge in manufacturing and resulting unit volume, and the possibility that software will allow the company to eventually generate operating margins in the mid-20s.

On the manufacturing front, Piper increased its 2020 delivery estimates based on Tesla’s recent second-quarter numbers. The firm believes Tesla can hit its original 2020 delivery guidance of 500,000 units, which it notes is impressive, given factory closures due to COVID-19.

Piper suggested Tesla can scale rapidly in the coming years. The constraint isn’t customer demand, but instead capacity, the analyst suggested. Of course, building out production capacity is no small and cheap feat. Still, with customer demand wide open, Piper sees big revenue gains moving forward.

The latter argument feels more speculative. A 25% operating margin implies that the automotive company’s gross margins would need to be far higher, a seeming stretch for a company that sells molded metal and plastic in a competitive market.

The basis of Piper’s argument centers on Tesla’s software, specifically its FSD, or “full self-driving” feature, an $8,000 add-on that provides advanced driver assistance over its standard Autopilot system.

Let us provide some quick backstory so that everyone understands: Today, Tesla vehicles come standard with Autopilot, an advanced driver assistance system that offers a combination of adaptive cruise control and lane steering. Tesla once charged for this feature as well, but made it standard in April 2019.

The more robust and higher-functioning version of Autopilot is called full self-driving. FSD includes the parking feature Summon as well as Navigate on Autopilot, an active guidance system that navigates a car from a highway on-ramp to off-ramp, including interchanges and making lane changes. The system now recognizes and responds to traffic lights, as well.

Still, Tesla vehicles are not self-driving cars. The system requires a human driver to remain engaged at all times.

Piper believes the FSD price will continue to rise, driving up margins. The firm predicted the cost of FSD could rise as high as $40,000.

“Thanks to the high-margin nature of the FSD package, we think that by the 2030s, Tesla could conceivably be selling vehicles at cost — or even below cost — while still achieving higher operating margins,” Piper wrote.

There is a very material catch to all of this. Tesla is able to recognize FSD revenue on its balance sheet as it rolls out more features. In other words, Tesla has to keep improving the product to be able to capture that entire line item.

In the first-quarter earnings call, Tesla CFO Zachary Kirkhorn explained that the company takes “roughly half” of the FSD as revenue. The other half of it goes into deferred revenue.

“Our deferred revenue balance is continuing to grow,” he said at the time. “It’s a little bit over $600 million. And so as we release features with time, at the end of every quarter, we take a look at what features have been released, associated value and then we can release that from the deferred revenue into our financials for that quarter. And then cars going forward, once the feature is released, we can recognize that revenue.”

For Tesla shareholders, institutional and retail alike, Piper’s report is welcome. Now Tesla has to live up to raised expectations. The company reports earnings on July 22. TechCrunch will be tuned in.

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