How Tesla’s Self-Driving Initiatives Add Value

How Tesla’s Self-Driving Initiatives Add Value

Tesla (NASDAQ:TSLA) CEO Elon Musk made headlines recently by saying that his electric vehicle company is “very close” to achieving level 5 autonomous driving technology. “I remain confident that we will have the basic functionality for level 5 autonomy complete this year,” Musk said in a video message, as reported by Reuters. TSLA stock popped on the comments.

tsla stock

But many industry insiders and self-driving engineers are dubious of Musk’s claims. After all, level 5 autonomy means a truly self-driving car, that can drive anywhere, at any time, under any condition, without ever needing any human assistance.

Gill Pratt, the CEO of the Toyota Research Institute, said “none of us in the automobile or IT industries are close to achieving true level 5 autonomy.” The CEO of Volkswagen’s autonomous driving division has said that level 5 autonomy may never actually happen. Another insider I spoke to in the industry said level 5 autonomy is several years away, at best.

So is Musk just blowing hot air? Or is Tesla really miles ahead of the competition on the self-driving front? And most importantly, what does all this mean for TSLA stock?

Let’s take a deeper look.

Tesla’s Self-Driving Tech Is Unique

As many probably already know, Tesla is attacking the self-driving market from an entirely different angle than the status quo.

Most of the self-driving companies – including market leader Waymo – are using LIDAR technology to solve the self-driving problem. That essentially means they are just throwing tiny sensors onto their cars to help the cars detect and respond to their surroundings.

Tesla, thinking that such sensors are unnecessary, is instead using built-in cameras for detection. This is a questionable route, since many perceive cameras as they currently stand as having materially weaker detection capabilities than LIDARs. But the hope is that as camera technology advances, detection capabilities will advance, too, and LIDARs will become obsolete.

In that world, Tesla will have a head-and-shoulders leader in the self-driving market.

But we aren’t in that world yet.

Still, even without camera tech advancing to match LIDAR tech, Tesla has one big advantage in the self-driving world: data.

The company has hundreds of thousands of cars out there in the real world, logging millions of miles, all of which can be tracked, stored and used as real-world driving data to inform Tesla’s self-driving systems.

Level 5 Target

Automation is built on the back of data. The more data you have, the better your automation tech will be. In theory, then, Tesla should be able to leverage its robust driving data-set to be one of – if not, the – first company to launch self-driving.

But level 5 autonomy? This year?

Based on my conversations with industry insiders, I highly doubt it.

Still, Tesla’s self-driving initiatives should not be laughed at. They are unique and promising, and the company has a visible and realistic opportunity to emerge as a leader in this market that will one day measure in the trillions of dollars.

Business Model Has Question Marks

When it comes to how Tesla plans to make money off its self-driving tech, there are still some question marks.

The most obvious way is to sell the self-driving technology to Tesla car buyers. Indeed, Tesla is already doing this. The company sells its “full self-driving capability” package for $8,000 per car. As Tesla’s self-driving tech improves, that number will go up. Probably to $10,000-plus in the near future.

As such, the most obvious financial benefit of self-driving tech is a material boost to Tesla’s average selling price per car. The number of cars Tesla sells will likely go up, too, as self-driving hype drives increased consumer demand.

Beyond that, however, it’s unclear how Tesla plans to further monetize its self-driving tech.

Most of the self-driving companies in this space are targeting their efforts at one of two verticals: ride-sharing or logistics. Think self-driving Uber (NYSE:UBER) cars, or self-driving delivery trucks.

Tesla could make a splash in one of those markets. But Tesla’s cheapest car, the Model 3, is still far more expensive than your average Uber car, so the unit economics of powering a city-wide ride-sharing program on Model 3s aren’t all that great. Also, while Tesla has unveiled an electric semi-truck, the company has yet to ramp up production of that truck.

In other words, while Tesla has upside potential through applying self-driving to the ride-sharing or logistics markets, such upside potential lacks clarity and tangibility today.

Self-Driving Adds Value for Tesla Stock

By my numbers, self-driving in any capacity adds big value for TSLA stock.

Longtime readers of mine know that my base case on Tesla assumes that: 1) EVs reach mainstream adoption by the end of the decade, 2) Tesla maintains leadership position in the global EV market, and 3) Tesla’s profit margins materially improve thanks to economies of scale. On those assumptions, my base case for Tesla is that the company earns $120 in earnings per share by 2030.

However, if the company does successfully roll-out advanced self-driving technology for its cars, then that number could go up. Both because Tesla will sell a lot more $8,000-plus full self-driving package add-ons to consumers, and because self-driving hype will drum up increased consumer demand.

Based on a market-average 17-times forward earnings multiple and a 10% annual discount, my base case without mass self-driving adoption yields a 2020 price target for TSLA stock of about $900. The same math in the mass self-driving adoption case boosts the price target on TSLA stock to about $1,250.

Obviously, both of those numbers are below the current TSLA stock price.

To that end, I think it’s clear that some upside from Tesla making noise in the autonomous ride-sharing or logistics markets is being priced in. Not much. But some.


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