Elon Musk finally makes a credible prediction.
- Elon Musk’s prediction that self-driving is “really the difference between Tesla being worth a lot of money or worth basically zero”, is one that I find credible, the problem being, of course, that Tesla shares are already worth a lot of money.
- Elon Musk made this prediction in an interview with the Tesla Owners Silicon Valley YouTube channel which will have his critics scurrying to see if they can get him on another SEC violation.
- Either way, this is a statement that I can wholeheartedly agree with but the problem is that the valuation of Tesla is already assuming that it becomes a giant in self-driving vehicles and robotaxis.
- The big idea is relatively simple in that once its cars can drive themselves, Tesla will offer a robotaxi service which will be able to charge $1 per mile (50% of ride-hailing today).
- This service will cost around $0.35 per mile to deliver leaving Tesla with $0.65 per mile or 65% gross margin.
- The $0.35 per mile cost estimate is in line with RFM Research’s in-house analysis of the economics of self-driving vehicles.
- If this proves to be the case, then Tesla will have created a cash machine of large proportion where even a value-oriented investor like me could see some value.
- However, Mr Musk is making two big assumptions in which I have less faith.
- First, self-driving: The idea that Tesla will become a highly profitable robotaxi business means that it must achieve full self-driving before anyone else.
- This is what will allow it to have its vehicles on the road first and therefore have the market and the opportunity to itself while it ramps up for scale.
- The problem is that it will not be the first to market as GM Cruise, Waymo and WeRide already have vehicles on the road with no safety driver in the vehicle whereas Tesla does not.
- I suspect that this is because Tesla’s approach to self-driving where it does not use Lidar and does not use a map is slowing it down to the point where when it finally has the vehicles ready, there will be plenty of others already present.
- This means the serviceable market for Tesla will be less and competition will be greater than Tesla currently expects.
- Second, economics: The likelihood is that Tesla will not be alone when it comes to market with a robotaxi service means that the economics are going to be very different.
- Ride-hailing today is already a realm of brutal cut-throat competition and there is no reason to expect that robotaxis will be any different.
- The only reason why the per-mile charge does not fall below $2 per mile is that no one can make any money below that level.
- However, Mr Musk is hanging Tesla’s valuation on its ability to earn 65% gross margins from robotaxis.
- This would be possible if Tesla had the market to itself, but all of the indications are that there will already be multiple players by the time Tesla enters the market.
- Hence, there will be a fight to the death for market share meaning that the price of a robotaxi will not be $1 per mile but something closer to $0.42.
- This will mean that profit generation will be 70% less than expected which creates a big issue for the question of what Tesla is worth as a business.
- The problem that Tesla faces is that the share price is already assuming substantial success and high profitability from robotaxis despite the fact that its shares have already fallen by 45% from their all-time high set last year.
- If it was assuming marginal success in robotaxis on a model of $0.42 per mile and 20% margins and a modest slice of the EV market, then I would entertain Tesla as an investment.
- It has a very long way to fall even from here before it does that.
