Data by YCharts While Tesla investors could be looking towards cheaper models and the next-gen $25K vehicle (i.e., volume growth) to justify its premium valuation, I firmly believe that Mr. Market is pricing Tesla as an AI & robotics company (i.e., giving a lot of credit for futuristic projects like FSD, Dojo, and Optimus humanoid robot) and not an EV maker. Here's why: If Tesla were priced like an auto company at say ~10-20x P/E, assuming NTM EPS of $3, TSLA stock would be trading at $30-60 per share or $105-210B in market cap. Looking at it from a different angle, without a high-margin AI/software business [FSD + Optimus], Tesla is probably worth less than $200B. Since Tesla's current market cap is $700B, the market is essentially ascribing a value of $500B to autonomy! As I see it, Tesla is a binary bet on autonomy, and Elon Musk seems to agree: The value of Tesla overwhelmingly is autonomy. These other things are in the noise relative to autonomy. So I recommend anyone who doesn't believe that Tesla will solve vehicle autonomy should not hold Tesla stock. They should sell their Tesla stock. If you believe Tesla will solve autonomy, you should buy Tesla stock. Although the numbers sound crazy, I think Tesla producing at volume with unsupervised FSD essentially enabling the fleet to operate like a giant autonomous fleet. And it takes the valuation, I think, to some pretty crazy number. ARK Invest thinks, on the order of $5 trillion, I think they are probably not wrong. And long-term Optimus, I think, it achieves a valuation several times that number. Source: Tesla Q2 2024 Earnings Transcript. Solving autonomy is hard, but in my view, Tesla is heading in the right direction and getting closer in its endeavor, with miles per intervention apparently climbing higher and FSD 12.5 getting rave reviews from users! Tesla Q2 2024 Earnings Call Transcript (Seeking Alpha) Tesla Q2 2024 Earnings Call Transcript (Seeking Alpha) According to Elon Musk, he has been too optimistic about the timeline for achieving autonomy, but as of now, he expects Tesla FSD to reach full autonomy by the end of next year: Tesla Q2 2024 Earnings Call Transcript (Seeking Alpha) When I laid out my bullish investment thesis for TSLA stock at ~$180 per share earlier this year, I wrote the following: In 2023, Tesla produced 1.8M vehicles and exited the year with an annualized production run rate of 2M vehicles! And, unlike most of its EV competitors (legacy auto and pure EV startups), Tesla is making billions of dollars in free cash flow making electric vehicles. Like Tesla's management, I don't know how much of its serviceable-addressable-market Tesla has already captured in its automotive business. However, I the growth runway for Tesla is very, very long. The world's transition to renewable energy is inevitable, and so is electrification of the auto market. As of 2023, EVs make up 9% of total auto sales globally, and this number will continue to rise for several years to come. Hence, Tesla may not grow rapidly over the next couple of years, but this incredible growth story has many more chapters to come. Furthermore, Tesla's Energy Storage business has incredible momentum and an even longer growth runway ahead of itself. As I shared earlier in this note, Tesla's services (& other) revenue is becoming a meaningful piece of the business, and this segment should continue to record strong growth as Tesla's fleet size increases and in general growth of the EV market [remember all major auto manufacturers are adopting Tesla's charging standard, with Tesla opening up its supercharging network to other auto OEMs]. In addition to these tangible businesses, Tesla is also developing ambitious futuristic projects like FSD (full self-driving), Optimus (humanoid robot), Dojo (AI chips), etc. While the outcome of these ambitious projects is uncertain and success is far from guaranteed, Tesla could potentially generate hundreds of billions of dollars per year if all or some of these projects were to work out. Let me share some napkin math on the potential of FSD as a recurring revenue business for Tesla: As of Q4 2023, Tesla has ~400K FSD users in North America (with a total fleet of 5.7M vehicles, i.e., an attach rate of ~7%. While I do not have data on the split between upfront ($12K) and FSD subscriptions (Basic autopilot: $199 per month, Enhanced autopilot: $99 per month); let's assume this ratio is 50:50 for the purpose of this exercise. Over the next five years, I see Tesla's vehicle fleet growing to ~20-22M vehicles (considering the next-gen vehicle's launch in 2026). If FSD reaches full 'L5' autonomy by then, I think attach rate could easily rise from 7% today to ~25% in the long run [and this could prove to be conservative]. Furthermore, Musk has repeatedly claimed that FSD reaching full autonomy will boost the price of each Tesla to ~$100-200K, which basically means the value of FSD would likely ~10-15x from current price of $12K. Let's assume it only goes up by ~5x. In this scenario, Tesla could potentially extract ~$1K per month from each FSD subscription (depending on use for ride hailing in idle time). Considering the 50:50 split between upfront and FSD subscriptions, a 25% attach rate (5M FSD users -> 2.5M FSD subscriptions) would result in FSD generating ~$30B in annual recurring revenue just via subscriptions! I am not even considering the upfront FSD sales numbers, and I think my assumptions are conservative. Imagine Tesla's fleet growing to 100-200M vehicles over the long run and attach rates rising to 50-90%! More importantly, FSD is likely to command software-like margins. Hence, FSD could very well become Tesla's primary profit center if full autonomy can be achieved. Again, this is just some napkin math, but it shows how FSD could be an absolute game changer for Tesla. Source: "Tesla: Learn From The Past, Think Of The Future (Rating Upgrade)." Now, I understand that FSD could need a few more years to reach full autonomy, and it may fail to do so due to technology and/or regulatory hurdles. However, Tesla FSD moving from Supervised to Unsupervised will be the equivalent of Apple's iPhone or Nvidia's GenAI moment! Tesla Q2 2024 Earnings Call Transcript (Seeking Alpha) Tesla Q2 2024 Earnings Call Transcript (Seeking Alpha) As an investor, ignoring Tesla FSD would be a grave mistake. While I don't factor in any revenues from FSD into my valuation model to instill a margin of safety there, our steady-state free cash flow ("FCF") margin assumption is based on Tesla building a sizeable AI/software business. For now, I am not considering Optimus and other projects like Dojo into my modeling. If those moonshot projects pay off, I will be happy to have received them as free embedded options for buying/owning Tesla stock! Tesla Fair Value And Expected Returns While Tesla is set to experience slower growth and continued margin pressures for the next couple of years, we must continue to take a long-term view of the business to determine its fair value. As such, I am sticking with our long-term growth and steady-state margins assumptions. TQI Valuation Model (Free to use at TQIG.org) On the back of a double-digit post-ER decline, Tesla has lost a bit of its froth and moved somewhat closer to our fair value estimate of ~$180 per share. Assuming a base case exit multiple of ~25x P/FCF, I see Tesla stock going from ~$220 to ~$436 per share over the next five years at ~14.7% CAGR. TQI Valuation Model (Free to use at TQIG.org) Considering Tesla's recent financial performance and uncertain business outlook, I view Tesla's near-term risk/reward as skewed to the downside. However, Tesla's 5-year expected CAGR return has moved up from ~11.6% to ~14.7% after last week's stock price decline, which is roughly in line with my investment hurdle rate of 15%. Hence, Tesla is a modest "buy" under our valuation process. TSLA Stock Technical Setup From a technical standpoint, Tesla's bullish momentum is still intact despite its post-ER pullback, as TSLA stock is still trading above a confluence of key moving averages, i.e., 10-week, 20-week, 40-week, and 100-week. In my view, the $185-210 range should serve as a strong support for the stock, with the rising trend line connecting bottoms from 2020, 2022, and 2023 (marked in yellow dotted line) providing secondary support at ~$165. This seems like a decent buying area for long-term investors. Tesla stock chart 7/28/2024 (WeBull Desktop) Now, if TSLA stock starts breaking down below $160-165 again, then we could see another leg down into the low-$100s. Such a decline would likely materialize in the event of a hard landing in the economy. Tesla is currently investing billions of dollars into its ambitious AI projects. However, if its core businesses were to become unprofitable during a recession, the company could have to pull back on its autonomy investments due to lack of capital. A failure or perception of failure on autonomy can relegate TSLA stock to an auto industry P/E multiple, i.e., $30-60 per share. Concluding Thoughts Barring a recession, Tesla's financial performance should continue to improve in upcoming quarters. However, as we have seen in this article, Tesla's near-term financials have little to do with its valuation. Tesla is a binary bet on autonomy, and only investors with a long-term horizon and a stomach for volatility should consider allocating capital to Tesla at current levels. In my view, investors with a 1-2 year investment horizon should continue to avoid Tesla. On the other hand, I like the idea of restarting accumulation for investors willing to look beyond a couple of years due to Tesla's favorable long-term risk/reward. At my investing group, we like to operate with a 5+ year time horizon, which is why we will restart slow, staggered accumulation in TSLA stock at our next bi-weekly deployment. To be clear, we understand that Tesla could drop more than 50% from current levels in the event of a hard landing. The plan is to dollar-cost average for the next couple of years even if Tesla keeps spiraling lower during this low-growth period for the EV giant. Key Takeaway: In light of its Q2 2024 report, I rate Tesla a modest "Buy" in the low-$200s, with a strong preference for slow, staggered buying over the next 12-24 months. Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below. Want More Asymmetric Investment Ideas? To help supercharge our members' journey to financial freedom, we publish TQI's Asymmetric Ideas Series within our investing group - "The Quantamental Investor". Since launch in April 2023, TQI’s Asymmetric Ideas Series has grown to 16 Picks, with the average return for these ideas standing at +54%. While past performance is no guarantee of future returns, nailing three 3-bagger [200%+ return] stocks in 16 months is a solid validation of our proprietary investing methodology. If you’d like for TQI’s Asymmetric Ideas Series to be delivered right to your inbox every month, join TQI Basic or Full Access now. This article was written by