Few companies can polarize the bulls and bears faster than Tesla (NASDAQ: TSLA). The shares are up more than 1,100% in the past five years, which certainly favors the bulls. But bears question the high valuation and worry about CEO Elon Musk’s unpredictability.
The sentiment is certainly strong on both sides. But what should a neutral, level-headed investor do with Tesla stock today? Well, you could start by listening to the leader of the company himself. Musk has honestly said who should not have to investing in Tesla stock, and that’s what we’ll explore.
According to Musk, the key to Tesla’s future
Tesla makes and sells electric vehicles (EVs), installs solar energy products, and has energy storage products and services. But in the first quarter of 2024, Musk didn’t mention these things when talking about who should or shouldn’t invest in Tesla.
In the first quarter earnings call, Musk said, “If someone doesn’t believe Tesla is going to solve autonomy, I don’t think he or she should be an investor in the company.” In other words, Tesla’s future is all about autonomous driving.
In context, Musk was referring to autonomous taxis, or “robotaxis.” The robotaxi vision allows someone who owns a Tesla vehicle to add it to the robotaxi network. The company will also have its own robotaxi vehicles. People simply use the app to request a ride, and a driverless Tesla taxi navigates to the user.
In theory, the benefit of the robotaxi system will be twofold. First, it will encourage people to buy a Tesla vehicle. In 2019, Musk said that owners who add their vehicles to the network could earn between $10,000 and $30,000 per year, which would offset the cost of ownership.
But the bigger theoretical benefit for Tesla will be the money it makes directly from robotaxis. Even if someone else’s car is used, Tesla will still take a cut of the robotaxi fare. Plus, it will have its own cars on the road that make money autonomously.
Fund manager Cathie Wood is the founder of Ark Invest, which is notoriously bullish when it comes to Tesla stock. In 2023, the investment firm put a stake in the ground, expecting Tesla stock could reach $2,000 per share by 2027 — that would be a stunning gain from the $190 per share it’s trading at now. But many investors may not realize how much of this benefit is due to robotaxis.
Ark Invest suggests that by 2027, the robotaxi business alone could account for two-thirds of Tesla’s enterprise value. To rephrase these numbers, Ark Invest says that 74% of the upside for Tesla stock today could come from the robotaxi view. Elon Musk is thinking along the same general lines, which is why he said investors shouldn’t buy Tesla stock unless they believe the company can solve the autonomy problem.
What should investors do now?
To reiterate, Musk said you should only invest in Tesla stock if they think it can solve autonomy. Here are my thoughts on this.
First of all, autonomy has already been solved, so to speak, from a technological point of view. GM‘s Cruise Unit and Alphabet‘s Waymo is already active in major US cities. The cruise is currently suspended due to a safety review following an accident. But Waymo is still on the road and even working together Uber Technologies to find more riders. Uber’s ride-hailing rival Lyft is also experimenting with autonomous driving.
Tesla itself has also shown compelling autonomous capabilities. Autonomous driving is therefore possible. If this is true, why aren’t Tesla shares racing higher towards Ark Invest’s price target? Well, there’s just more to it.
During Tesla’s Autonomy Day presentation in April 2019, Musk said he was confident robotaxis would be on the road by 2020. But he hedged this statement by talking about regulatory approval. That’s a tough nut to crack and is beyond Tesla’s control.
Cruise, for example, already had approval and took a victory lap in April 2023, reporting that he had completed 1 million self-driving miles with 54% fewer collisions than a human driver. But even with a tangible safety record like this, it lost approval after an accident involving a pedestrian in October.
It’s hard to imagine that Tesla could quickly achieve a better track record than Cruise’s. But even Cruise’s track record wasn’t enough to keep him on the road after something went wrong.
Additionally, Musk has talked about having a million robotaxis transporting passengers about 100 hours a week. Many investors believe this size can be achieved virtually overnight once regulatory hurdles are overcome. Therefore, these investors are already taking the robotaxi network into account when valuing the stock today.
The first part of this assumption is reasonable: there are already more than a million Tesla vehicles on the road, and they could all be robotaxis with a software update and owner permission.
But at 100 hours per week, it’s assumed Tesla vehicles will be in use more than half the day, and that’s before you consider the owner driving somewhere or taking the time to charge. Perhaps some high traffic areas may require something like this. But I find it hard to believe that there are 100 million hours of weekly taxi demand for Tesla in the US.
In conclusion, I don’t necessarily doubt that Tesla can solve autonomy, because it has already been solved. The real problem is finding enough user demand after maintaining regulatory approval, assuming that’s the case. Personally, I don’t believe any of this will happen on a large scale before the end of this decade. Considering its valuation is already positively impacting the robotaxi view, this is one of the reasons why I’m not a buyer of Tesla stock at the moment.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Tesla and Uber Technologies. The Motley Fool recommends General Motors and recommends the following options: In January 2025, $25 would appeal to General Motors. The Motley Fool has a disclosure policy.
Elon Musk Says You Shouldn’t Invest in Tesla Stock Unless You Believe It’s One Thing About the Future Originally published by The Motley Fool
