Financial Analysts Question The Merit Of Tesla’s Robotaxis

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Following discussions with the Tesla investor relations team, JPMorgan analysts earlier this month said they soon expected Tesla to reveal a robotaxi prototype. The investment firm also offered the caveat that Tesla’s robotaxis and their associated revenues could be years away.

That’s the kind of speculation that has been occurring since the June 2024 Tesla Annual Stockholder Meeting. Can Tesla reframe its identity to that of an autonomous vehicle company? Several analysts doubt that Tesla can make such a substantive shift. In fact, many are predicting that, when Tesla hosts its long-planned robotaxi event on August 8, the actual winner just might be Alphabet or Amazon.

Seeking Alpha is an online space where financial experts share ideas and research about investing and trading. Yeah, I know: sometimes the authors are bombastic, a bit too over-the-top. Then again, some of their insights can cause us to mull over our own investment perspectives.

On Friday, one of their articles caught my eye. It discusses Elon Musk’s continued insistence that Tesla’s robotaxi plans will become the fodder for the company’s future success. “The overwhelming focus is on solving full self-driving,” Tesla CEO Elon Musk stated in 2022. “It’s really the difference between Tesla being worth a lot of money or worth basically zero.”

The Seeking Alpha article also does a close financial reading across the pro/con autonomous spectrum. Here are some highlights.

Cathie Wood’s influence: Fund manager Cathie Wood made headlines with her $2,600/5-year price target for Tesla, Inc., with a best-case scenario of $3,200, 17X upside by 2029. Her thesis is that 90% of Tesla’s value will come from licensing its self-driving tech, thus capturing much of the $9 trillion revenue of the robotaxi industry by 2030. “We think that the robotaxi opportunity, globally, will deliver $8 to $10 trillion in revenue by 2030,” Cathie Wood stated.

• Bear Tesla Case Target: $2,000 per share by 2029 (25th percentile outcome)
• Base Tesla Case/Expected Value Target: $2,600 per share by 2029 (50th percentile)
• Bull Tesla Case Target: $3,100 per share by 2029 (75th percentile outcome).

ARK analysts, led by Tasha Keeney, put out a report on June 12 detailing their latest bullish predictions for Tesla. The authors argue that Tesla will skyrocket nearly 1350% by 2029 — and robotaxis are the optimist thesis. Tesla’s electric vehicle business is expected to generate about a quarter of total sales in 2029 but only about 10% of Tesla’s earnings. Tesla’s stock is currently the largest holding of the Ark Innovation exchange-traded fund ARKK.

An ARK Invest report from February 2024 concurred, reinforcing the idea that they see robotaxis “transforming global transport with point-to-point transportation to be available in nearly every country at an average price of ~$.50 per mile.” They project that robotaxis will have traveled 13 trillion vehicle miles by the late 2030s.

Tesla’s expected financial picture, past and looking ahead to 2029: Tesla’s free cash flow is expected to hit $14.6 billion in 2029 with just $12 billion in capex spending. In December 2020 alone, Tesla raised $7 billion in secondary stock offerings, including $5 billion worth of stock sales.

Expected cost for a robotaxi: Robotaxis will likely cost $150K to $200K each, according to the Seeking Alpha writer’s research, and building a global fleet would cost over $35 trillion. Amazon and Alphabet’s Waymo have the necessary cash flow — does Tesla? One robotaxi might be able to replace 5.6 vehicles since the average car is idle 95% of the time. With a cost of about $175,000 per vehicle, it would likely cost at least $1 per mile for a robotaxi subscription, assuming Tesla’s $0.50 per mile fee is 50% of revenue. If a company isn’t getting at least 50% of sales, it would be unlikely to license FSD from Tesla. To build a fleet of 260 million robotaxis at $175,000 each: Cost = 260,000,000 vehicles x $175,000 per vehicle = $45.5 Trillion. That’s $46 trillion to build out a global robotaxi fleet. Can Tesla hope to fund even a fraction of that? Tesla 10X to a $6 trillion market cap, driven by absurd levels of AI/robotaxi mania.

Update: CleanTechnica’s Zach Shahan has written a response to the core assumptions here in another article: Critique of ARK Analysts’ Tesla Robotaxi Projections Misses Some Key Points, But ARK Might Too.

The importance of free cash flow when developing a robotaxi: Even if Wood is correct about Tesla’s robotaxis as a massive potential future market, Tesla isn’t expected to dominate it. Amazon’s subsidiary, Zoox, is developing autonomous vehicles to provide mobility-as-a-service in dense urban environments. This potential upside is as high as 18X in the best-case scenario, higher than Tesla’s (9% faster income growth). By 2030, analysts expect Amazon to generate over $200 billion in free cash flow and, by 2028, achieve the record for most free cash flow in any year. Amazon without robotaxis is still Amazon, a car company with a potential 300% upside to fair value within three years.

What’s the Amazon competition got going for it? Zoox was founded in 2014 to reimagine personal transportation from the ground up by creating a new kind of vehicle designed specifically for autonomous driving rather than retrofitting existing cars. Zoox has been testing its self-driving technology in several cities across the US, including San Francisco, Las Vegas, and Seattle, with plans to expand to Miami and Austin. It has received approval to carry passengers in Foster City, California. Tesla has no robotaxis — yet. Will Musk produce one on August 8?

Will transportation as a service become wildly adopted by millions by 2023? The US Department of Transportation’s Federal Highway Administration states that the average person drives around 13,476 miles annually. To make robotaxis a dominant form of transportation and achieve an $8 to $10 trillion market size, robotaxis must provide an overwhelming economic and convenience benefit. Owning a robotaxi would increase cost savings and efficiency. Still, it must overcome a deeply ingrained cultural bias slanted toward individual car ownership. (As a Tesla Model Y owner, I can tell you that I treat this expensive vehicle as if it is a work of art. I would never allow it to be used to drive around drunk college kids who vomit after overdrinking or who’d smoke the good stuff inside my vehicle.)

Would companies be able to afford a fleet of Tesla’s robotaxis? The ultimate value of transportation as a service would be to own the fleet and sell subscriptions to consumers — a family plan, say, $100 per family, for unlimited monthly rides. Whoever licenses Tesla’s tech has to pay for the enormous robotaxi fleet, with an annual depreciation cost of around $32,000 or $90 daily. The occupancy rate or vehicle occupancy is a critical factor. Higher occupancy means fewer robotaxis are required to service the same travel demand. Boston Consulting Group reports that the average taxi occupancy is around 1.2 passengers, but robotaxis might be able to go as high as 2.

Demand would exceed capacity: A significant city like New York with 8 million residents, even assuming 20% simultaneous demand at peak hours, would need around 800,000 robotaxis for prompt 5-minute service with that occupancy. For the global population of around 8 billion, even a 5% simultaneous peak demand would require around 200 million robotaxis globally. Allowing a 30% redundancy factor for peaks/maintenance, a reasonable global robot-taxi fleet size could be around 260 million vehicles.

What if Tesla’s robotaxis fail? If robotaxis fail, Tesla is in trouble, according to CEO Elon Musk. In Tesla’s Q4 2021 earnings call, Musk said the company’s $800+ billion market cap at the time “can be justified through a ‘roadmap’ of potential growth” from transforming Tesla’s cars into robotaxis that can generate significant incremental revenue through software margins.