Don’t Fall for Elon Musk’s Self-Driving Car Fallacy

The Tesla CEO continues to overestimate the lengthy-term profit doable of Tesla’s self-driving automobile expertise.

Adam Levine-Weinberg

Closing Can also fair — when Tesla (NASDAQ:TSLA) shares were Trading for around $150 on a split-adjusted foundation — CEO Elon Musk opined on Twitter that Tesla’s stock attach used to be doubtlessly too high.

Tesla stock attach is too high imo

— Elon Musk (@elonmusk) Can also fair 1, 2020

As Tesla stock persevered to upward thrust for the length of the leisure of 2020 and sustained its huge gains, Musk began to change his tune. By the level Tesla held its fourth-quarter earnings name closing week, the stock had greater than quintupled from the stage that Musk had thought about “too high” no longer as much as a twelve months within the past. On the replace hand, the Tesla CEO laid out a case for why the approaching arrival of fat self-driving expertise would justify the company’s lofty valuation.

There’s true one area: Musk’s entire argument is constructed upon a fallacy. Let’s preserve a look.

Elon Musk math

Closing twelve months, Tesla’s automobile income reached a story $27.2 billion, and the company earned a GAAP working profit of $2 billion. Tesla expects to grow dramatically from that impolite. It projects that this might additionally amplify its automobile deliveries about 50% per annum on moderate within the shut to term, as it increases its battery and assembly capability, localizes manufacturing, and introduces new items.

Easy, per Tesla’s Wednesday closing attach of $864.16 and its diluted allotment count of 1.124 billion shares, the company had an entirely diluted market cap of near to $1 trillion. Even though Tesla were in a position to grow its earnings tenfold, it can possibly no longer justify the company’s latest valuation without aggressive expectations for persevered hiss.

All by blueprint of Tesla’s latest earnings name, Musk opined that the stock stays reasonably valued if one components within the profit doable of the fat self-driving capabilities Tesla is constructing.

… [I]f Tesla’s ships, shall we embrace, hypothetically, $50 billion or $60 billion price of vehicles, and these vehicles change into fat self-driving and might possibly even be frail … as robotaxis, the utility increases from an moderate of 12 hours per week to doubtlessly an moderate of 60 hours per week. … [L]et’s true judge that the auto becomes twice as worthwhile … that might possibly be a doubling as soon as more of the income of the company, which is almost fully harmful margin. … [I]t would be like … having $50 billion of incremental profit on the entire from that because or no longer it’s true system.

In quick, Musk argues that FSD skill will originate every automobile Tesla builds dramatically extra treasured, because it can possibly even be frail greater than a deepest automobile. Musk believes that Tesla will consume that extra price as almost pure profit, driving a huge earnings inflection that might possibly enable the company to originate tens of billions of bucks per annum inside of a pair of years — with so much of room to preserve rising.

A silver Tesla Model 3 parked on a road, with a green field in the background

Record offer: Tesla.

It be a giant fallacy

Alas, this “blueprint” is constructed on a fallacy. First, while same old automobile owners might additionally spend true 12 hours per week of their vehicles, valid taxis in finding frail a long way extra normally. In Recent York City, as an illustration, some taxis are frail for double shifts and can operate 100 hours per week (or much extra). Those vehicles don’t seem to be extra treasured true because they are going to be frail extra: Production prices decide the auto’s selling attach greater than intended usage.

Second, Statista estimates that the global marketplace for taxis and slither-hailing will reach $260 billion this twelve months. That represents a noteworthy replace, but getting to $50 billion of income or extra might additionally no longer be easy. This can preserve time for robotaxis to disrupt the old ridesharing and taxi markets. And even after they attain, Tesla will face hundreds opponents, as an limitless series of varied companies also hope to roll out robotaxi products and services.

Robotaxi products and services might additionally originate higher margins than auto producers in some unspecified time in the future. On the replace hand, Musk’s implicit assumption that Tesla might additionally double its income with minimal incremental prices — thus incomes pre-tax margins of 50% or extra — is clearly false. If Tesla were to keep its robotaxi charges high ample that it can possibly additionally originate such lofty margins, opponents would undercut it on attach and desire its market allotment. This competitive dynamic will sharply restrict the incremental profit replace from using Teslas as robotaxis.

Look to the core industry for Tesla’s price

Many Tesla bulls quiz the company to change into the largest automaker on this planet inside of 10 or 15 years, delivering 10 million or extra vehicles per annum. If Tesla can pull that off while achieving double-digit automobile working margins and develop profitable aspect companies in solar, batteries, and robotaxis, Tesla stock might additionally no doubt grow into its valuation over time.

On the replace hand, investors mustn’t count on robotaxis as a magic bullet that will originate Tesla massively winning in a single day. Tesla might additionally originate a nice robotaxi industry on the aspect, but the core auto industry’ hiss will decide whether or no longer Tesla stock continues to hover or plunges support to earth within the decade forward.

Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.”>

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