Mentioned Companies: BIDU, GM, GOOG, NVDA, TSLA

Tesla’s Autonomous Opportunity is Severely Underappreciated

August 14, 2018
8 min read
By: Tasha Keeney, CFA

ARK believes that analysts may be overlooking Tesla’s[TSLA] largest addressable market – autonomous mobility-as-a-service (MaaS). During its earnings call last week, Tesla introduced its Autopilot team for the first time as speakers during the prepared remarks. Based on the information presented by the Autopilot team on the performance characteristics of its in-house chip, we believe Tesla could be ahead of its competitors in the autonomous hardware space – a key element in the MaaS market. However, there were only a few questions from analysts regarding the impact of this technology.

ARK estimates that electric vehicle sales will outpace expectations in the next five years, reaching 17 million units sold in 2022, and Tesla will be a market leader. Perhaps more importantly, the autonomous MaaS market, which according to our research should be valued in trillions of dollars today given the massive future cash flows, is nowhere to be seen in most valuation models.

The auto market is undergoing a massive transformation as we transition toward autonomous electric vehicles. We estimate that net revenue for autonomous platform providers – those companies that own the software technology stack for autonomous ride-hailing services – should exceed $2 trillion by 2030, roughly equal to our expectations for automaker revenue at that time. Unlike their auto-manufacturing peers, however, autonomous platform providers should see software-like margins, be less capital-intensive, and enjoy network-effect-driven regional competitive dominance.

So, while autonomous platform providers may generate the same revenue as automotive manufacturers, ARK believes these providers will generate six times the operating earnings and consequently will prove to be substantially more valuable. In fact, ARK estimates autonomous platforms will be worth more than the entire $4 trillion global energy sector.

While Tesla’s autonomous progress is out of public view because of the way it tests its technology, its massive data library suggests it could have a lead in autonomous driving. While Google[GOOG], GM[GM], and others use fleets of autonomous test vehicles, Tesla is able to leverage its customer fleet to test Autopilot features in shadow mode, by running software in the background with no direct impact on driving, feeding valuable information back to Tesla.

Thus, Tesla is not subject to the same regulatory reporting requirements that Google faces in California, for example, where performance data is made publicly available. Still, it’s fair to assume that Tesla has collected billions of miles of data from its customer fleet, compared to the millions of miles that Google has been able to rack up.Tesla’s fleet size also could provide a more robust system to test features compared to Google’s hundreds of test vehicles.

Tesla has developed an autonomous chip that is at least 3 years ahead of any other automotive manufacturer.[1] Musk explained,“whereas the current NVIDIA’s[NVDA] hardware can do 200 frames a second, this is able to do over 2,000 frames a second and with full redundancy and fail-over.” Tesla is currently using an Nvidia chip with 12 teraflops of performance. A tenfold improvement would suggest Tesla’s chip has roughly 120 teraflops of performance. Nvidia’s Xavier chip, which is currently sampling and likely won’t be installed into vehicles until late 2019, has roughly 30 teraflops of performance. In other words, traditional automakers have committed to a chip with inferior specs, and will likely have to wait for Nvidia’s next autonomous product before they can have a processing system comparable to the system Tesla is testing today.

A fully autonomous ride-hailing service would improve Tesla’s margins significantly. Elon Musk has said that a fully autonomous version of Autopilot will be available in 2019. Given Musk’s history of stretch goals, perhaps this will translate into a 2020 or 2021 launch.

An enhanced Autopilot package with the ability to self-drive costs $5,000 upfront or $6,000 for customers who choose to wait and buy later. Payment for this feature alone can be thought of as nearly pure profit on every Tesla sold.[2]

In addition, once Tesla launches the Tesla Network, its autonomous ride-hailing network, it could collect platform fees, similar to Uber’s model today, from every autonomous ride charged to the consumer. Given a rate of $1 per mile to the end consumer and over 100,000 miles per year per vehicle, Tesla could benefit from $20,000 in high-margin platform fees per car per year.

Over a five-year lifetime, a single Model 3 could generate $40,000 in net cash flow. Even investors optimistic about Tesla’s prospects project the Model 3 cash flow at $4,000 and one-time in nature. In effect, each Model 3 sale could generate 10 times more cash flow than investors currently understand.

Of course, it’s possible that Tesla fails to create a fully autonomous car. While Tesla believes full autonomy is achievable without LiDAR, this has yet to be proven.[3]

Tesla also has competition and will likely not be first to market with full autonomy. Waymo is launching its commercial autonomous service this year in Phoenix and likely will be first to market. GM’s Cruise Automation plans to launch its service next year, perhaps also beating Tesla to the punch. Lastly, Baidu[BIDU] will likely dominate China’s autonomous market, as its project Apollo was chosen as the government’s designated national autonomous driving platform.

What we believe gives Tesla an edge is its data set and validation system given by its vast customer fleet. These factors may allow Tesla to create a path planning system that overcomes the shortfall of its LiDAR-deficient sensor set. Given that Elon Musk has a history of making the once-impossible possible, we wouldn’t put it past him.

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