Tesla's Challenges: EV Struggles, AI Promises, and the Trillion-Dollar Robotaxi Question

Tesla's Current Equity Story: Weak AI Promise On Top Of Struggling EV Business (TSLA)

I maintain that Tesla stock is at risk of a significant re-rating, potentially aligning with the valuation of a typical GARP asset, which could bring the share price down to approximately $90. Tesla, Inc. (NASDAQ:TSLA) reported results for the June quarter on July 22nd, and shares declined by more than 10% since the earnings release -- and the selloff has continued since. The world's leading electric vehicle ("EV") manufacturer reported only 2% YoY growth in sales, while gross margins in the automotive business fell to a seven-year low. Looking at the remainder of 2024, I doubt that a turnaround in the automotive business and a growth re-acceleration is likely. To shift investor focus away from a struggling core business, CEO Elon Musk is increasingly pointing to upside from autonomous driving and AI-related businesses. On that note, however, investors should note that the upside in Tesla's AI venture is very speculative, and won't accumulate significant shareholder value until mid-2030, according to my expectations. With a struggling core auto business and increasing uncertainty around Tesla's success and timeline in AI ventures, I maintain the view that Tesla stock is at risk of a significant re-rating. This is potentially aligning with the valuation of a typical GARP asset that could see the share price down to ~$90, reflecting an EV/EBIT multiple of around 30x. Noting the share price performance, Tesla stock has substantially underperformed the market year-to-date. Since the beginning of the year, TSLA shares have fallen by approximately 12%, compared to the S&P 500's (SP500) gain of about 15%. Tesla reported results for Q2 on July 22nd and delivered a mixed performance: During the period spanning April to the end of June, Tesla generated $25.5 billion of revenue, exceeding the consensus estimate of $25.0 billion by 2.0%, according to data collected by Refinitiv. However, revenue expansion in Q2 slowed to 2% YoY, a rate that makes it close to impossible to justify Tesla's enormous growth valuation premium. Within segments, revenue in the automotive business dropped 7% YoY, while energy generation and storage revenue and services/ others expanded at 100% and 21%, respectively. Tesla gross profit in Q2 reached $4.58 billion, surpassing the consensus of $4.39 billion by 4.4%, based on a gross margin of 18.0%. However, it is noteworthy to point out that Tesla's automotive gross margin (excluding credits) was at a seven-year low of 14.6%, reflecting the impact of price cuts and the Cybertruck launch. Earnings before interest and taxes were reported at $1.605 billion (6.3% margin), 15% below the consensus of $1.89 billion. Admittedly, this figure includes significant restructuring and other costs amounting to $622 million. Excluding these costs, the underlying EBIT margin was 8.7%. Non-GAAP EPS came in at $0.52, missing the consensus estimate of $0.62 by 16%, and down 43% YoY. Lastly, free cash flow was reported at $1.34 billion, significantly below consensus expectation at $1.95 billion, while the company closed Q2 with a net cash position of $18.2 billion. Tesla's management indicated that the company is in a transitional phase between growth waves, with energy deployments expected to grow faster than the vehicle business. Following weak Q1 and Q1 automotive performance, paired with a weak consumer demand for auto in 2H 2024, it should be clear that Tesla's 2024 growth will be noticeably below that of 2023. On that note, I highlight that Tesla's core automotive business faces challenges due to its aging product lineup and market saturation in key regions such as the US and Europe. The company's reliance on older models like the Model 3 and Model Y limits its ability to drive significant revenue growth through new offerings. Additionally, competitive pressures from both traditional automakers and new entrants in the electric vehicle market are intensifying, further constraining Tesla's growth potential in the automotive sector. As the below chart highlights, Tesla's market share looks to be topping at ~4%, ~3%, ~2% for the U.S., Europe and China, respectively. To shift focus away from a struggling automotive growth story, Musk is increasingly pointing to growth upside from speculative ventures that pose significant execution risks, such as Robotaxis and Optimus. In that context, Elon Musk himself said the following on the latest Tesla earnings call: The value of Tesla overwhelmingly is autonomy. These other things are in the noise relative to autonomy. So I recommend anyone who doesn't believe that Tesla will solve vehicle autonomy should not hold Tesla stock. They should sell their Tesla stock. You should believe Tesla will solve autonomy, you should buy Tesla stock. And all these other questions are in the noise. Investors agree: According to a survey conducted by Morgan Stanley, about 70% of investors see the value of Tesla related to "AI" opportunities, rather than the core auto business fundamentals. (Source: Morgan Stanley research note on TSLA, dated July 17th). This is negative, in my view because associating share price expectations with AI narrative renders the company vulnerable to a sharp sentiment repricing. In my view, there are two distinct, not necessarily mutually exclusive, business models for monetizing Tesla's Robotaxi technology: First, there is the Robotaxi manufacturer and network operator model: Tesla could design, develop, and produce Robotaxis and operate a ride-hailing platform. This model allows Tesla owners to add their vehicles to the network, similar to an Airbnb (ABNB) approach. This strategy would limit Tesla's upfront investment, but might also cannibalize new car sales. Second, there is the full ride-hailing Service: Tesla could launch a fully autonomous ride-hailing service with a fleet of Tesla-owned vehicles. While this approach allows Tesla to retain more economic control, it requires significant investment, with potential cash burn of multi-billion dollars before reaching break-even. In any case, in relation to Full Self-Driving technology and robotaxis, I highlight that these business opportunities remain highly speculative due to regulatory hurdles, technological challenges, and societal acceptance issues. Incidents like the suspension of Cruise's permit in California following a pedestrian accident illustrate the regulatory and public perception hurdles Tesla must overcome. While I acknowledge the potential long-term value of autonomous driving, the timeline for widespread adoption is uncertain, and I, personally, do not expect meaningful market penetration before mid-/late 2030s. On top of this uncertainty and long-dated timeline, Tesla may face significant cash burn, potentially exceeding many billion annually, exacerbated by the need to invest heavily in AI hardware and network infrastructure. So the equity story for Tesla's self-driving ambition does no look all that attractive to me, at this point. So, long story short: Tesla's equity value is increasingly connected to an AI promise. However, there is currently little concrete evidence to support the thesis that Tesla is making substantial progress towards an autonomous future -- and one that can also be commercialized. Definitely, in any case, progress will be long-dated and costly. With a struggling core auto business and increasing robotaxi uncertainty, I continue to argue that Tesla stock could be at risk of a significant re-rating, potentially aligning with the valuation of a typical GARP (Growth at a Reasonable Price) asset. In this context, I consider a ~$90 per share valuation reasonable, reflecting an EV/EBIT multiple of around 30x, similar to the multiples seen in Microsoft (MSFT) and Nvidia (NVDA) shares. However, if Tesla were to align with the lower end of the GARP spectrum, shares could trade at an EV/EBIT multiple of approximately 20x. This is akin to the multiples for Meta Platforms (META) and Google (GOOGL), suggesting a target price as low as ~$60 in my bear case. Note enclosed valuation map is from TD Cowen. (Source: TD Cowen research note on Tesla dated July 23rd: BIG HAT, NO CATTLE.) The $90 target price is also in line with my adjusted valuation model for Tesla (to be used as a reference only, as projecting estimates to 2030 is clouded). By 2030, I see Tesla selling about 10 million cars annually, at an ASP of approximately $39.000, and a 9% profit margin for cars. In addition, I project that for every dollar of hardware sale, Tesla generates about 35% of software revenue at a 35% margin (approximately in line with Apple). Tesla reported its results for the June quarter on July 22nd, causing shares to decline by more than 10% since the earnings release: For Q2, revenues in the automotive business were up only 2% YoY, while gross margins in the fell to a seven-year low. Looking ahead to the remainder of 2024, I am skeptical that a turnaround in the automotive business and a re-acceleration of growth is likely. To divert investor attention from the struggling core business, Elon Musk is increasingly highlighting potential upside from autonomous driving and AI-related ventures. However, it is important for investors to recognize that the upside in Tesla's AI venture is highly speculative and is not expected to enhance shareholder value significantly until the mid-2030s, based on my projections. With the core auto business facing challenges and growing uncertainty around Tesla's success and timeline in AI ventures, I maintain that Tesla stock is at risk of a significant re-rating. This would potentially align with the valuation of a typical GARP asset, which could bring the share price down to approximately $90, reflecting an EV/EBIT multiple of around 30x. I reiterate a "Strong Sell" rating on Tesla, but also highlight that the thesis could change swiftly if Tesla manages to make substantial and undeniable progress in self-driving technology and other autonomous/ AI business ventures.

Tesla: The Worst Is Ahead (NASDAQ:TSLA)

Considering that Tesla trades at over 85 times its forward earnings and over 6 times its forward sales, it makes sense to assume that its shares are extremely overvalued. After releasing a relatively poor earnings report two weeks ago, Tesla, Inc. (NASDAQ:TSLA) shares lost most of the momentum that was gained at the start of July when the electric vehicle ("EV") deliveries data came out. While the company certainly has several growth catalysts going for it, which could prevent a further depreciation of its shares, the increased competition within the EV industry along with the rising geopolitical challenges could disrupt Tesla's business model. This would make its stock a less attractive investment. Back in May, I noted that the ongoing price war within the EV industry and the Sino-American trade war could disrupt Tesla's business model and result in the contraction of the company's margins. Despite this, I did not give the company's stock a rating of SELL, since there was always the possibility that its shares could rally in the short term on any positive data. That's precisely what has happened. Since the publication of my latest article on Tesla in May, its shares have appreciated by ~20%. However, after the latest rally, the shares are once again starting to lose their momentum, primarily due to the release of the relatively weak earnings report for Q2 a couple of weeks ago. It indicated that the macro challenges are making it harder for the business to deliver a solid bottom-line performance. While Tesla reported that its revenues during the recent quarter increased by 2.3% Y/Y to $25.5 billion and were above expectations by $760 million, its non-GAAP EPS of $0.52 was below the consensus by $0.10. At the same time, the company's quarterly deliveries fell for the second quarter in a row as it delivered 443,956 vehicles in Q2, down 4.8% Y/Y. What's more, is that Tesla has once again delayed its robotaxi event and at this point, it could take years before we see an actual robotaxi fleet on the streets. Moreover, there's a possibility that Tesla will invest in AI startup xAI, which has already been receiving Nvidia (NVDA) chips that were meant for Tesla on Elon Musk's orders. However, what matters the most at this point is that the challenges that Tesla faces continue to mount, and no events or investments in other businesses are likely to help the company quickly improve its state of affairs. The biggest issue that Tesla currently faces is the compression of margins. If we look closely at the latest numbers, we'll see that gross margins, operating margins, and EBITDA margins, all were down Y/Y in Q2. At the same time, Tesla has experienced a second straight quarterly net income decline and what's worse is that out of $1.48 billion in net income, $890 million came as regulatory credits. This indicates that even the organic growth is relatively weak at this stage. All of this is due to the rising competition within the EV industry and the ongoing price war between EV manufacturers, that has already diminished Tesla's ability to expand its margins and deliver a solid bottom-line performance. The major problem here is that it's unlikely that things are about to change for the better anytime soon. In a recent conference call, CEO Elon Musk admitted that the discounting in the EV sector has made it difficult for Tesla to thrive. At the same time, the rise of affordable Chinese cars is likely partially responsible for the weaker guidance for the rest of the year. Recently, Tesla's management noted that the company's vehicle volume growth rate this year may be notably lower in comparison to the previous fiscal year. On top of all of that, the rising geopolitical risks threaten to significantly disrupt Tesla's business model, which is exposed to the globalized supply chain. The IMF warns that further trade restrictions could wipe out 7% of the global GDP and would likely prevent the recovery of the global economy. Tesla has already put on hold its plan to build a factory in Mexico, due to tariff concerns. Chinese policy analysts don't believe that Sino-American relations will improve and lead to the end of the ongoing trade war after the Presidential elections in November. At the same time, the European Union last month increased tariffs on most Chinese-made electric vehicles. Considering that Tesla produces only Model Y in Europe and imports Model 3 there from China, there's a risk that its performance in Europe will be negatively affected in the future, as it already raised prices on the old continent. Given that the company is already experiencing a deterioration of margins, the worsening macro environment makes it even harder for Tesla to improve the situation to its favor. With all of that in mind, it makes sense to assume that Tesla, at the very least, would be an extremely volatile investment in the foreseeable future. To figure out whether its shares offer any margin of safety, I've updated my DCF model, which can be seen below. The model from the previous article from May showed Tesla's fair value to be $128.49 per share. The major thing that was changed in the updated model below is the revenue growth rate for FY24 and beyond, which was decreased and currently closely correlates with the street expectations. Recently, Tesla has received dozens of revenue downward revisions, which indicates that the street also expects weaker growth in part due to the rise of several challenges described earlier in this article. All the other assumptions in the model remained the same as before, as they're unlikely to significantly change at this stage. The updated model shows that Tesla's fair value is $119.46 per share, which represents a downside of ~42% from the current market price. Considering that Tesla currently trades at over 85 times its forward earnings and over 6 times its forward sales, while Seeking Alpha's Quant system gives it a rating of F for valuation, it makes sense to assume that the company is extremely overvalued at the current price. While Tesla faces major challenges right now, there are nevertheless several positive developments going on that can help the company find a way to improve its performance in the future. Considering that the American GDP is growing at a better-than-expected rate while interest rate cuts appear to be around the corner, there's a possibility that the U.S. economy will accelerate even more in the second half of the year. This would help Tesla and all the other carmakers boost their sales. Even if we see an improvement in deliveries in Q3, then the shares could once again rally, as it could be interpreted as a sign that things are changing for the better. At the same time, the potential release of a more affordable vehicle in 2025 could also help Tesla diminish the Chinese threat, outlive its weaker competitors due to its sizable war chest, and gain additional market share in the end. All of this could make investors once again excited about Tesla's future and propel its shares to higher levels. Despite facing a significant number of challenges, it would be ignorant not to pay attention to several growth catalysts that could revive the investors' confidence and once again boost Tesla's shares in the future. However, it also makes no sense to believe that any momentum could be long-lived, given the recent weaker bottom-line performance and the deterioration of margins. That's why it's difficult to justify a long position in Tesla right now. This is especially true, since it's not the same solid investment as it was during the pre-covid and early COVID-19 days. That was when the aggressive increase in sales in a much better environment propelled the shares to exuberant multiples at which they traded for a significant amount of time. The environment is much different right now and the rising geopolitical challenges could negatively affect Tesla's business model, which significantly relies on the undisrupted globalization, which appears to be fading away. The constant delay of its other products along with Elon Musk's involvement in politics and his other business endeavors also make Tesla a less attractive investment. The only reason why I'm not giving Tesla, Inc. a rating of Sell and stick with Hold is because it's a battleground stock with a major cult following. Such stocks typically trade at an exuberant valuation for a long time and experience a major depreciation, mostly when there's an overall market selloff or the underlying company reports weak earnings. Recently, Tesla's shares have already depreciated due to the overall selloff and a weak earnings report. However, they nevertheless could find a technical support level around the current market price and trade there until the next earnings report is released a few months from now. That's why, even though Tesla's fundamentals are relatively weak, its stock could continue to trade at exuberant multiples for a while.

Insights Into Tesla's Trillion-Dollar Robotaxi Question From Elon Musk (NASDAQ:TSLA)

The Tesla robotaxi announcement also has implications for investors in Uber, Waymo, and Cruise. Tesla, Inc. (NASDAQ:TSLA) investors and analysts are highly focused on its anticipated robotaxi business. There are some extreme projections about the value of a robotaxi business to Tesla. For example, ARK Invest has a $2,600 stock price for Tesla. It projects a $2,600 stock price for Tesla by 2029, with a $2,250 value from the robotaxi service and $350 without it. That implies that Tesla's robotaxi business could be valued at more than $5 trillion! So, understanding Tesla's robotaxi business as much as possible and setting appropriate expectations about it seems to be among the most important investor questions in the stock market today. In this article, I try to shed some thoughtful light on this trillion-dollar question for investors by interpreting CEO Elon Musk's own words (those from others are obviously meaningless). Although he hasn't given specific guidance on Tesla's future robotaxi business, Musk tends to openly share more of his unvarnished thinking than most other CEOs, and you can learn a lot from them. All of Elon Musk's quotes here are from either his Q1/24 Earnings Call Transcript or his Q2/24 Earning Call Transcript. Is The Robotaxi Tesla's Future? Autonomous robotaxis are the future for Tesla. In the Q1/24 earnings call, Musk claimed that investors should only focus on autonomy or not invest in Tesla: So we're doing well. But I think Cathy Wood said it best, like really, we should be thought of as an AI or robotics company. If you value Tesla as just like an auto company, you just have to - fundamentally, it's just the wrong framework and it will come to be. If you ask the wrong question, then the right answer is impossible. So I mean, if somebody doesn't believe Tesla is going to solve autonomy, I think they should not be an investor in the company. He also made highly optimistic projections for the robotaxi business in his Q1 earnings call (I'll examine how realistic these estimates are later in this article). It will be 7 million cars in a year or so and then 10 million and then eventually, we're talking about tens of millions of cars. Not eventually, it's like, yes, for the end of the decade, its several tens of millions of cars I think. What Insights Can We Get Into The Tesla Robotaxi? So, the viability, timing, and ultimate success of Tesla's robotaxi business is essential for Tesla investors. Let's start by examining some critical questions. I'll summarize my conclusions at the end. Is Tesla FSD ready for a robotaxi? Elon Musk (Q2/24) believes that its Full Self-Drive (FSD) is ready or very close to being ready for autonomously driving a robotaxi: Regarding Full Self-Driving and Robotaxi, we've made a lot of progress with Full Self-Driving in Q2, and with version 12.5 beginning rollout, we think customers will experience a step change improvement in how well-supervised full self-driving works. Version 12.5 has 5x the parameters of 12.4 and will finally merge the highway and city stacks. So, the highway stack is still at this point is pretty old. So often, the issues people encounter are on the highway, but with 12.5, we are finally merging the two stacks. I still find that most people actually don't know how good the system is, and I would encourage anyone to understand the system better, to simply try it out and let the car drive you around. One of the things we're going to be doing just to make sure people actually understand the capabilities of the car is when delivering a new car and when picking up a car for service to just show people how to use it and just drive them around the block. And as we increase the miles between interventions, it will transition from supervised full self-driving to unsupervised full self-driving, and we can unlock massive potential. I almost agree with him. Tesla has made great improvements to its FSD over the last couple of years. I've personally driven some of its latest software versions over the last two months, and there have been many improvements since my criticisms two years ago. The maps are now high-definition with the detail necessary for autonomous driving. The FSD vehicle can turn corners safely and stop at traffic lights and signs. It can anticipate the number and curvature of lanes it is turning into. And much more. Musk's remark about the importance of merging the two software stacks (highway and metropolitan) is correct. It's a significant step. Tesla's maps have also improved dramatically in resolution and accuracy. In "Navigate on Autopilot" mode, the vehicle follows the map very well. While much improved, Tesla FSD is not 100% perfect. For example, it still goes too fast on some curves in the road and doesn't slow down early enough to exit highways. It changes lanes when it shouldn't. It still can't manage right-turn-on-red situations very well, and most likely won't be able to. There are no standards for these signs; some are unique, with restrictions at certain hours. I enjoy letting the Tesla drive itself while others in the car watch with amazement --- and well with fear, too -- while the car stops at traffic lights and stop signs and then turns on its own. That combination of amazement and fear is what will shape the eventual adoption rate of the robotaxi market. A Tesla in FSD can't drive in all locations and situations. It cannot be classified as SAE Level 5, where a vehicle can drive anywhere under any conditions. However, if Tesla added geofencing to its maps, it could be capable of SAE Level 4, which is enough for autonomous ride hailing services (robotaxis). Elon Musk hasn't discussed geofencing at all and seems to ignore it, but it could be how Tesla can successfully launch its robotaxi service. Geofencing limits the routes a robotaxi can travel to those that have been proven by repeated testing and updated regularly. It can then avoid roads where it won't work safely. It can avoid construction sites and even be updated quickly to avoid emergencies like fires and accidents. If Tesla doesn't use geofencing to limit autonomous driving initially to safe and proven routes, then it increases the risk of serious accidents. It only takes one serious accident to derail its service. Will Tesla unveil a new vehicle for its robotaxi? According to Musk's comments (Q2/24), the new robotaxi to be unveiled on October 10th will be a different vehicle and will be the key to the event: We postponed the sort of Robotaxi the sort of product unveil by a couple of months where it were -- it shifted to 10/10 to the 10th October -end because I wanted to make some important changes that I think would improve the vehicle -- sort of Robotaxi, the thing that we are -- the main thing that we are going to show and we are also going to show off a couple of other things. So moving it back a few months allowed us to improve the Robotaxi as well as add in a couple other things for the product unveil. And I should say that the Cybertaxi or Robotaxi will be produced here at our headquarters at Giga Texas." Will Tesla call its new vehicle the Cybertaxi? There have been no substantial leaks of what the vehicle might look like, but Elon Musk offered this photo for his biography last year. It will most likely be a beautiful, passenger-friendly vehicle that includes Tesla's latest hardware, computer system, and most advanced FSD software. It may require Tesla hardware Versions 5. Furthermore, it will be built in Tesla's Austin factory, and I expect production in 2025. Expect that Tesla fans will go wild over it, and it could quickly bump its stock price. Will the new robotaxi vehicle have driver controls? Although Musk has yet to confirm it, the new robotaxi will most likely be a custom-designed passenger-focused vehicle. The photo above and a recently leaked interior photo suggest this. The National Traffic Safety Administration (NHTSA) requires all new vehicles sold in the US to comply with Federal Motor Vehicle Safety Standards. The standards include all driver controls, such as the steering wheel, brakes, mirrors, etc. Autonomous ride hailing vehicles (robotaxis) don't need driver controls, so they require an exception to these standards. As GM found with its Origin, this is very difficult to attain. At the Q2/24 earnings call, George Gianarikas asked that question regarding regulatory approvals for the new vehicle. Maybe just to expand on the regulatory question for a second. And I could be comparing apples and oranges, but GM canceled their pedal-less, wheel-less vehicle. And according to the company this morning, their decision was driven by uncertainty about the regulatory environment. And from what we understand, and again, maybe I'm wrong here, but the Robotaxi that has been shown, at least in images of the public, is also pedal-less and wheel-less. Is there a different regulatory concern just if you deploy a vehicle like that that doesn't have pedals -- pedals or a wheel, and that may not be different from just regular FSD on a traditional Tesla vehicle? Thank you. Musk didn't refute the question by saying it would have driver controls and not require special federal regulatory approval; instead, he criticized GM in his response: Well, obviously the real reason that they cancel it is because GM can't make it work, not because the regulators, they're blaming regulators. That's misleading of them to do so, because Waymo is doing just fine in those markets. So it's just that their technology is not far. Note: Waymo is using standard vehicles with driver controls even though they aren't used, so it doesn't require exceptions. It seems like Musk may not understand this issue sufficiently. Tesla should expect a long and tedious process for getting federal approval to deploy a robotaxi without driver controls, contrary to Musk's comment that the reason for the delay was General Motors' (GM) technology. However, Musk may hold a "Trump Card" in this. If Donald Trump is elected president with millions of dollars of support from Musk, Tesla could get fast-track approval for a driverless robotaxi vehicle. Will the Tesla robotaxi service be fleet-based? While there will definitely be a Tesla robotaxi fleet, there remain two big questions about the makeup of this fleet: (1) will it be based in municipalities? And (2) what Tesla owners will be able to offer their vehicles to the fleet. From the Q1/24 earnings call, Musk made it clear there will be a gigantic fleet: So you can think of like how Tesla, think of it's like some combination of Airbnb and Uber, meaning that there will be some number of cars that Tesla owns itself and operates in the fleet. There will be some number of cars and then there'll be a bunch of cars where they're owned by the end user. But really, the way to think of Tesla is almost entirely in terms of solving autonomy and being able to turn on that autonomy for a gigantic fleet. And I think it might be the biggest asset value appreciation history when that day happens when you can do unsupervised full self-driving. Yes. It will be 7 million cars in a year or so and then 10 million and then eventually, we're talking about tens of millions of cars. Not eventually, it's like, yes, for the end of the decade, its several tens of millions of cars I think. He expanded on this in the Q2/24 earnings call, repeating his thoughts that it would be a mixed fleet of Tesla and customer-owned cars. This would just be the Tesla network. You just literally open the Tesla app and summon a car and resend a car to pick you up and take you somewhere. And now this is for a customer on fleet. So you can think of that as being a bit like Airbnb, like you can choose to allow your car to be used by the fleet, or cancel that and bring it back. It can be used by the fleet all the time. It can be used by the fleet some of the time, and then Tesla would take -- would share on the revenue with the customer. But you can think of the giant fleet of Tesla vehicles as like a giant sort of Airbnb equivalent fleet, Airbnb on wheels. The -- I mean, then in addition we would make some number of cars for Tesla that would just be owned by Tesla and be added to the fleet. I guess that would be a bit more like Uber. But this would all be a Tesla network. And there's an important clause we've put in, in every Tesla purchase, which is that the Tesla vehicles can only be used in the Tesla fleet. They cannot be used by a third-party for autonomy. Musk's current vision is for a hybrid Tesla fleet with specifically designed robotaxis and customer-owned vehicles. Tesla vehicles would probably include current models as well as the new robotaxi vehicle. Most likely, the new robotaxi vehicles will be more popular. There are major issues with the inclusion of customer-owned vehicles in the fleet. They would certainly require some form of certification by Tesla that they had the necessary hardware and software. Many current Tesla vehicles probably don't have that. They would need to have the robotaxi dispatch and monitoring software installed. They would most likely need to be managed by a fleet center for charging, cleaning, and maintenance. Customers wouldn't want to get a dirty car with laundry in the back seat and a low battery dispatched from someone's home. Customers would most likely need to assign their vehicles to the Tesla fleet for a period of time, such as several months, and not just for a few hours. Tesla will require significant capital investment if it provides a major portion of this fleet. Musk talks about millions of robotaxi vehicles. As a reference point, one million robotaxis would require an investment of approximately $45 billion. And 7 million in a year would be unaffordable. Perhaps, Tesla will get customers to buy its new robotaxi vehicle. If it included driver controls, then that might be possible. Maybe it could include retractable driver controls. That is something to look for in the announcement. Autonomous ride hailing services require fleets based in each metropolitan area they serve. Each fleet provides rides to passengers in that metropolitan area. Fleets also provide other critical services, including: Charging the vehicle, Inspecting and cleaning the vehicle, Updating the boundaries on geofenced maps, Working with local authorities such as first responders, Intervening with a disabled or confused vehicle, and Marketing and promoting the service locally. Fleets are rolled out by metropolitan areas deliberately over time. For an in-depth explanation, see: Autonomous Vehicles: Opportunities, Strategies, and Disruptions. Elon Musk doesn't seem to buy into this yet. In response to this question from Ferragu Pierre (Q2/24): Okay. And do you think that scale is like progressively so you can start in a city with just a handful of cars and you grow the number of cars over time? Or do you think there is like a critical mass you need to get to, to be able to offer like a service that is of competitive quality compared to what like the -- like Uber would be typically delivering already? Elon Musk's response I guess I'm not -- maybe I'm not conveying this correctly. The entire Tesla fleet basically becomes active. This is obviously maybe there's some number of people who don't want their car to own money, but I think most people will. It's instant scale. Will Tesla have its own robotaxi network or work with someone like Uber? Tesla will clearly have its own network with ride request and dispatch capabilities. Elon Musk (Q2/24) Yes. This would just be the Tesla network. You just literally open the Tesla app and summon a car and resend a car to pick you up and take you somewhere. (I think he actually said "we send" no "resend." This obviously dashed any of Uber's (UBER) hopes to get a piece of Tesla's robotaxi business. How big are Tesla's robotaxi aspirations? According to Elon Musk, its aspirations are huge: we'll have a fleet that's I don't know, on order of 7 million dedicated global autonomy soon. In the years come it'll be over 10 million, then over 20 million. This is immense scale. And the car is able to operate 24/7, unlike the human driver." So, just how big is the service provided by 7 million autonomous robotaxis operating 24/7? If each does 15 trips per day that equals 1,350 trips per quarter per vehicle. For 7 million vehicles, that would be 9.45 billion trips per quarter. To put this into perspective, Uber only had 2.6 billion trips (both passenger and delivery) in the last quarter of 2023 for gross bookings of $37.6 billion. That would give Tesla quarterly revenue of $135 billion (remember bookings for ride-sharing equals revenue for autonomous ride hailing services because it eliminates the 70% share to drivers) or, if you assume a lower price per trip, maybe $100 billion per quarter. This also assumes little or no competition. However, I think Tesla will have some very significant competitors. Overall, I think Musk's estimates are overblown and not based on reality. Potential Impact on Waymo and Cruise A Tesla robotaxi business will have significant competition. Waymo (GOOG) and Cruise (GM), particularly Waymo, are the leaders in this market and should continue to hold leadership positions. Cruise has rapidly increased its paid autonomous ride hailing services in California over the last nine months. August 2023 May 2024 Trips per Month 12.6K 143.6K Miles per Month 101.3K 903.5K Passengers per Month 19.7K 204.4K Click to enlarge Tesla will have a lot of catching up to do. Tesla's planned entry will help validate the market and accelerate adoption. That should accelerate revenue growth for both Waymo and Cruise, as more people will accept autonomous ride hailing services. I doubt Tesla will gain significant market share over these two in the next 2-3 years, if ever. Conclusions Musk's earnings calls provide important inferences to investors about its robotaxi business. It's clear that Tesla is "all in" on becoming an autonomous vehicle robotaxi business. It's unprecedented that a CEO would discourage investors from investing in his company unless it changes. Tesla investors should take his advice, decide what they are investing in, and understand the potential and risks to its future as an autonomous robotaxi company. I expect Tesla's unveiling of a new robotaxi vehicle will capture the imagination and create great interest. It could be one of the major events of the year. It will also accelerate interest in autonomous ride hailing. The new robotaxi vehicle will most likely go into production sometime in mid to late 2025. Tesla's FSD can autonomously drive a robotaxi, with a significant caveat. It must be restricted to geofenced boundaries. Musk doesn't recognize this yet, but I expect that he will come to that conclusion. While this slows the launch of the autonomous ride hailing service, it doesn't diminish its potential long-term success. Musk has also ignored the need for local, state, and federal approvals, and this will be a problem that will slow its launch. My best estimate is that Tesla will begin testing its robotaxi business in 2025 and begin to launch it in 2026. So, investors will need to be patient. His thoughts about an instant national scale of millions of autonomous vehicles providing passenger-paid rides are fundamentally infeasible, irresponsible, and extremely risky. It would violate city, state, and federal regulations, create havoc, and immediately cause numerous accidents. To make a robotaxi business feasible, he needs to scale back expectations to get the required approvals and launch it initially in selected metropolitan areas with geofenced boundaries. If Tesla does that, it will have a viable robotaxi business, but not of the immediacy and scale he predicts. I love Tesla's technology and vehicles, and I drive regularly in FSD mode. I also agree that the market for autonomous ride hailing (robotaxis) will be massive. However, I don't like Tesla as an investment. At its current valuation with a forward P/E of 92X on relatively flat revenue, the potential for a robotaxi business is already included. There is little upside in the valuation and plenty of downside risk. As I previously discussed in my previous SA article, the Tesla robotaxi announcement will present some risks for Uber. It also makes you wonder if there is any reality to Tesla's robotaxi business possibly being worth more than $5 trillion. If so, then what could be the potential value of Waymo and Cruise? Author of Autonomous Vehicles: Opportunities, Strategies, and Disruptions. Michael E. McGrath is a proven expert on the strategies of technology-based companies. He has researched autonomous vehicles for the last 3 years, leading to the original publication of this book, as well as the recently expanded and updated second edition. He is a founder of PRTM, the leading management consulting firm to technology companies, former CEO of i2Technologies and experienced board member, serving on four public company boards, as well as several venture capital-funded companies. In addition to Autonomous Vehicles, he is the author of Product Strategy for High-Technology Companies, which has been used by many technology-based companies to guide their strategies. Analyst's Disclosure: I/we have a beneficial long position in the shares of GM AND GOOG either through stock ownership, options, or other derivatives. 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