Tesla: Time To Take Profits
- by Seeking Alpha
- Jul 25, 2024
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specific cities
). If Tesla could launch a truly autonomous Robotaxi fleet with worldwide operations, it would be a differentiator, and a major revenue driver for the company. When the August rollout of the first Robotaxi was announced in the Q1 earnings call, it ignited a major rally in Tesla shares. The markets saw value in the idea, and they had good reason to: nobody else had done anything
this ambitious in driverless taxis. It was therefore understandable that TSLA stock crashed after Tuesday's earnings call: the expected catalyst got called off.
Personally, I was skeptical of the Robotaxi being able to turn Tesla’s fortunes around after the Q1 earnings release when optimism was running high. The reason I felt that way was that the concept of a Robotaxi faces more hurdles than mere technical feasibility. I have no doubt in my mind that Tesla can build full self-driving, or FSD, to the point where it can outperform the average human driver.
My skepticism mainly revolves around getting the Robotaxi approved in all the cities it will need to be approved in, to move the needle for Tesla on the revenue front. Getting all these regulatory approvals is far from a given, even if FSD can be statistically shown to be safer than a human driver. In its Robotaxi rollout, Tesla will likely face pushback from taxi drivers, safety advocates, and possibly even people who oppose Elon Musk’s politics. The process of getting the “Robotaxi Fleet” into numerous service areas could therefore take a very long time.
The fact that the Robotaxi’s big reveal was delayed to October was a bigger contributor to Tesla's post-earnings selloff than the earnings miss itself. As mentioned previously, EPS missed by a fairly narrow margin, and revenue actually beat expectations. That argues that the Robotaxi news was the dominant factor in the Tuesday after-hours selloff. Additionally, Tesla’s first quarter earnings missed estimates, yet the stock rallied on the Robotaxi announcement, which would seem to imply that Robotaxi hype has been influencing the trading in Tesla more than fundamentals have.
When I last covered Tesla stock, I rated it a hold. This particular “hold” was not perfectly neutral, as I said the risk to shorts was greater than the risk to longs (in other words, I thought that upside was more probable than downside on balance). Since then, Tesla stock has appreciated 26% in price, vindicating what I wrote.
While I still discourage shorting Tesla stock, I now think that the risks to longs are greater than the risks to shorts. For this reason, I am downgrading my rating to a (fairly low conviction) sell. While I don’t possess proof that the Robotaxi won’t go live and make Tesla a lot of money, TSLA longs lack hard evidence that it will. I do think I can prove that, if the Robotaxi launches, scaling it will be a very long, drawn out affair marked by bureaucracy in local jurisdictions, and much legal wrangling on Tesla’s part. TSLA stock is very much trading on one idea; bad news as to that idea's viability could easily trigger a selloff as severe as that seen on Tuesday. So people going long Tesla here are taking fairly major risks.
Why the Robotaxi is So Important
The reason Tesla’s AI-related projects like Optimus, FSD and the Robotaxi are so important, is because EV manufacturing is getting extremely competitive. Volkswagen (OTCPK:VWAGY) is a major player in Europe. BYD (OTCPK:BYDDY) is selling more electric cars than Tesla – in China and now internationally. There are also several smaller Chinese players like Li Auto (LI), NIO (NIO) and Xpeng (XPEV). The U.S.’s recent 100% tariff on Chinese EVs probably kept the Chinese manufacturers out of the U.S. market, but Volkswagen, Korean companies, and domestic companies are free to sell as much as they want in the United States.
The above makes it seem increasingly unlikely that Tesla will ever get its previous growth rates and margins back based on vehicle sales alone.
This is where FSD and the Robotaxi come into the picture. Tesla cars are not just hardware, they are linked to self-driving software. The self-driving software that Tesla is developing is uniquely ambitious in scope. Tesla is trying to make its cars autonomous anywhere, while competitors like Waymo train their AI on individual cities and launch very localized Robotaxi services. It’s much the same story with the Chinese EV companies: their AI is trained rigorously on specific cities where Robotaxis are eventually launched.
Tesla is trying to create full self-driving software that can operate basically anywhere. If the company nails this, then the financial benefits will be massive: it will be able to launch the “Robotaxi fleet” it promises, and its competitors will be nowhere near ready to scale to the same degree.
The problem is that FSD, and even more so the Robotaxi, keep getting delayed. FSD itself was in beta testing for years; the company recently dropped the word “beta” from the program name, which it now calls “FSD supervised.” “Supervised” means that you may have to take control of the steering wheel occasionally, which isn’t exactly what FSD was pitched as. For something to be “full” self-driving, it would need to complete the “full” task of driving all on its own. It therefore appears that Tesla merely renamed its FSD beta program, rather than achieving a “full” release.
This all has implications for the Robotaxi. The goal of that project is to have a fully autonomous fleet of taxis that can operate without drivers. That can’t happen as long as the software the Robotaxi runs on needs human supervision: an AI-aided taxi with a human driver (or “supervisor”) would likely cost just as much as an Uber (UBER), as there would be a human being to pay. So the Robotaxi sales pitch doesn’t really work until the “full” in “full self-driving” becomes a literal statement.
Furthermore, there will likely be regulatory hurdles in getting Tesla Robotaxis widely adopted even after FSD surpasses human driving skills. In a recent Reuters article, several car experts were quoted as saying that regulatory approvals would be a major hurdle for Tesla’s taxi project. This makes intuitive sense, as such issues have often cropped up for Uber, simply due to opposition from the taxi lobby. Tesla’s hypothetical Robotaxi fleet will face that same opposition, plus other forms of opposition from safety lobbyists and possibly Musk’s political enemies. It won’t be easy.
A Note on Valuation
Going by multiples, Tesla is a very pricey stock. According to Seeking Alpha Quant, it trades at the multiples shown below:
Tesla multiples
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