Published on May 18th, 2019 | by Carolyn Fortuna0
Will Self-Driving Cars Make Tesla A $500 Billion Company?
May 18th, 2019 by Carolyn Fortuna
In May 2019, the online investment blog Seeking Alpha (SA) published another article that dissed Tesla as a credible investment. Writing under the pseudonym “Sunset Analysis,” the author refuted Tesla CEO Elon Musk’s statement that self-driving cars have the capacity to make Tesla a $500 billion company. Calling it “a bold statement that doesn’t stand up under analysis of the competitive environment within the self-driving car arena,” Seeking Alpha held up its pattern of mocking all things Tesla.
The author cited 3 major reasons why he/she/it determined that Tesla’s future financial picture is bleak: 1) an unlikely exponential increase in Tesla valuation, 2) significant competition in the self-driving car arena, and 3) the company’s need to issue debt to fund development. What that article failed to acknowledge, however, is the existential crisis that looms before legacy car manufacturers as part of the upcoming mass embrace of electric vehicles and driver assist technology. With all indicators pointing to a significant upsurge in EVs beginning in 5 years and continuing on forcibly in 10, 15, and 20 years, the industry is changing — fast.
Tesla already has brand recognition, market-leading proprietary technology and manufacturing processes, top owner satisfaction and expert reviews, and proven capacity to translate vision into viable business practices. And Tesla’s ability to so strategically see and pursue the business behind autonomous driving further sets it apart from it competitors.
Establishing self-driving cars as a norm will move Tesla — a company that savors innovation alongside risk — beyond other car and tech companies. The Seeking Alpha article has missed the proverbial mark again when it comes to Tesla’s essence, innovation, and fiscal potential.
Musk’s most recent detailed comments about Tesla’s self-driving potential came at a April 22 event for investors at Tesla’s Palo Alto headquarters. The narrative included a not-so-far-in-the-future scenario in which self-driving Teslas vehicles compete with the likes of Waymo, Lyft, and Uber.
Musk described company advances that, by the middle of 2020, will improve Tesla’s autonomous system so much that a driver’s attention will no long have to be focused on controlling the vehicle. As part of that evolution, Tesla will introduce autonomous taxis in 2020 to certain US regions, and Tesla owners will be able to add their cars to this Tesla sharing network.
Described as having full autonomy and the capability to drive themselves on roads regardless of weather or other hazardous conditions, such taxis would exceed the self-driving functions available today of any cars on the road. “We will have more than one million robotaxis on the road,” Musk said. “A year from now, we’ll have over a million cars with full self-driving, software… everything.”
He added that the Tesla robotaxis could potentially generate $30,000 a year in profit for owners, which would be aided by the low maintenance the vehicles require (Tesla’s goal is that these cars last for at least one million miles). Tesla’s vehicle, solar, and energy businesses were just a fraction of company value, Musk indicated, but he suggested that self-driving systems in development now will make Tesla a $500 billion company.
The company’s current market cap stands around $42 billion.
Tesla Valuation as Art & Science
Tesla’s value is confounding, I will grant you. Most financial advisors ask everyday investors to take a long look when deciding on which stocks to land. We should remember that Tesla’s 2010 IPO price was $17. Early on, Musk promised that the advanced driver assistance capabilities on Tesla vehicles would continue to improve until eventually reaching a full automation plateau. Fast forward to 2019, a fiscal climate in which Musk says, “Buying a car today is an investment into the future.”
He described purchasing a Tesla as “buying an appreciating asset,” which is absolutely contrary to most schools of thought when considering automotive purchases, which are generally one of the highest depreciating assets (if not the absolute highest depreciating asset) most people ever buy. Importantly, Musk envisioned that some Tesla models will be worth up to $250,000 in the next 3 years as self-driving capabilities become pervasive. He went on to allude to “the possibility to earn income with your Tesla as a supporter of the car’s underlying value.” Though, he acknowledged that “this program’s value is yet to be seen.”
Seeking Alpha writers scoff at such notions of Tesla’s worth. They argue that necessary software upgrades are incomplete. They say that increasing Tesla prices will produce a drop-off in purchases. They argue that operational problems, including liability and trust in Tesla Network customers, will be barriers that can’t be overcome.
Oh, ye of little faith.
A common, more optimistic perspective suggests that Tesla’s tech-oriented products, luxury cars, and unique CEO make Tesla stock a popular choice among investors comfortable with a bit of risk. Most agree that autonomous driving is the next big revolutionary trend, and analysts like those at Canaccord Tenuity and ARK Invest believe that TSLA’s software has “an almost insurmountable lead” over its competitors.
Tesla is the only all-electric automaker of any notable size, which will be a huge advantage when more and more people switch to electric vehicles. The advent of self-driving car popularity, moreover, is a Tesla plus, with the firm’s autonomous driving software R&D a top reason for the optimism.
Significant Competition is Exactly What will Make Tesla a $500 Billion Company
Don’t you love to rip apart Seeking Alpha narratives?
Another recent Seeking Alpha article cited and paraphrased an MIT study to comment that “autonomous taxis may actually prove more expensive to operate and manage than their human-driven peers.” Okay, I know it’s difficult to digest white papers from academics, but the abstract that offers an overview of the study actually states the following:
“In a single ridership model, we find capacity utilization rates would need to improve by nearly 100% and margins lowered by 37% for autonomous vehicles to achieve cost parity with their conventionally driven counterparts. In a multiple ridership model, achieving cost parity requires a 30% increase in occupancy rates and a 75% increase were a stronger cost proposition offered to incentivize shared autonomous vehicle use over conventionally driven vehicles. We conclude that consideration of the opportunity costs of driving are integral to the widespread adoption of a technology that can dramatically improve public health outcomes.”
So, the actual conclusion to the MIT study indicates that companies that offer self-driving options will need to make autonomous vehicles more affordable to establish patterns of public consumption. That makes sense, as all social changes take time, with opportunities for first-hand experience often the key to systemic change. The MIT scholars offer examples such as autonomous around-town food deliveries, monetization of rider behavior, and other revenue gains from existing ancillary sources that may offset losses associated with offering lower fares.
The Seeking Alpha article does acknowledge that Tesla’s Autopilot has allowed the company to test various capabilities over a wide variety of geographic areas and to collect a large amount of varied data on a wide range of traffic scenarios. Sure, as with all R&D, it’s still unknown how Tesla’s technological progress will compare to that at other companies. For now, the Seeking Alpha piece concedes that Tesla’s chip does appear ahead of the competition at the moment. (Duh.)
Tesla’s Need to Issue Debt to Fund Development
Another Seeking Alpha article critiqued Musk’s easygoing approach to number-crunching at the Autonomy Day event, saying, “most of the claimed economic benefits have little basis in serious analysis.”
Musk: “Oh, pricing. We just threw some numbers on there. I mean, definitely plug in whatever pricing you think makes sense. We just kind of randomly said ‘oh, maybe a dollar (per mile) … probably a dollar is conservative for the next 10 years.’”
The Seeking Alpha author’s retort? “A shockingly blase attitude. … Musk’s numbers are clearly somewhat fanciful.” The idea that autonomous driving will revolutionize transportation is “far from certain,” citing a 2012 study — so ancient in the realm of research on this topic, and the year the Model S came out. Again, if we take the time to read that 2012 report closely, though, the study actually says autonomy “is capable of supplying better mobility experiences at radically lower cost under a wide range of circumstances” and “offers substantial sustainability benefits through improved roadway safety, reduced roadway congestion, increased energy efficiency, reduced emissions, improved land use, and enhanced equality of access.”
The Seeking Alpha article argues that Tesla is competing with companies that can “far better afford to burn money in development and who have specialized knowledge of particular industries involved, such as chip manufacturers.” Contrasting Tesla to competitors that possess amazing “cash piles of over $100 billion,” Seeking Alpha derides the company because it issues debt and stock in order to support operations.
That argument, however, fails to track probable company growth due to its well-positioned Gigafactories, its historical record attracting autonomous vehicle talent, and its success in this segment of the market so far. Even Morgan Stanley notes that Tesla has increasing production rates and a healthy (market-leading) resale market. (In a counterintuitive statement, they add that high consumer adoption to date may hurt the brand’s appeal and diminish demand for its cars, an odd idea we’re not even going to delve into here.)
The Problem with Constant Tesla Valuation Denials
Seeking Alpha’s founder, David Jackson, calls Seeking Alpha “crowdsourced equity research,” where contributors are “real investors rather than Wall Street analysts.” Articles can be published anonymously, which Jackson says diffuses tendencies for “newspaper owners (who) have political agendas, and individual journalists (who) bring their own biases to what they write about.” Is this bullshit or what? Jackson’s argument is based on a logical fallacy: isn’t biased reporting more easily hidden when authors are
expected allowed to hide their real identities?
Another problem, discussed on a recent Tesla podcast with a former Seeking Alpha contributor, is that it is not an open platform. Galileo Russell indicates that there seems to be regular censorship on the site, and other people CleanTechnica has heard from have said the same.
With the recurring paradigm of Tesla’s plans as “grandiose,” “naïve,” and “overstated,” critics like those who write for Seeking Alpha experience a failure of imagination. When seeking innovative and creative solutions to large-scale problems, Musk asks that his employees use the first principles method, in which individuals boil information down to its most basic idea and reason up from there. As Musk explained at a 2013 TED conference,
“We get through life by reasoning by analogy, which essentially means copying what other people do with slight variations. And you have to do that. Otherwise, mentally, you wouldn’t be able to get through the day. But when you want to do something new, you have to apply the [first principles] approach.”
Will autonomous driving potential make Tesla a $500 billion company? A conservative bet says, “maybe.” If anyone knew for sure, they’d be putting all of their money into Tesla [TSLA] today, but the point is that despite the heavy criticism from some corners of the internet, it’s quite possible that Tesla will, indeed, reach that highest of financial thresholds. In doing so, the company will still confront critics whose very livelihoods depend on the auto business status quo. Blemishing the Tesla image is an all-too-fascinating pastime for so many in the media and investment communities that it will be hard to let go.
Note: When I asked Tesla for a comment for this story, a Tesla spokesperson said that the company didn’t have anything further to share at this time beyond what they shared at Autonomy Investor Day.
Images via Pixabay, copyright free, an author Pixabay mashup, and Tesla Autonomy Day presentation.