Sales of electric vehicles (EV) account for more than 81% of total sales Tesla‘S (NASDAQ: TSLA) total turnover at the moment. The company could sell more than 2 million units this year, making it one of the largest EV manufacturers in the world.
But tech investor Cathie Wood thinks artificial intelligence (AI) – not electric vehicle sales – is the best reason to own Tesla stock. The company is using AI to develop its autonomous, fully self-driving (FSD) software, which has already traveled billions of miles in the real world in beta mode.
Wood’s company, Ark Investment Management, just released a new set of financial models that suggest electric vehicle sales won’t be the driving force behind Tesla’s success for much longer. Using AI, Ark predicts that 86% of the company’s revenue will come from something entirely different.
Tesla needs to move beyond just the passenger EV sector
When Tesla shares went public in 2010, doubters lined up. Few investors believed that its ambitious CEO, Elon Musk, could successfully design, build and sell electric cars. But he proved them wrong, and Tesla’s Model Y was the best-selling car globally across all categories in 2023.
But Tesla’s core electric vehicle business is slowing due to declining demand and increasing competition. The company delivered just 386,810 cars in the first quarter of 2024 (ending March 31), down 9% from the same period a year ago. Musk has not made a sales forecast for the full year of 2024, but some analysts believe the company will ship 2.2 million units. This will represent growth of just 22% – well below Musk’s target of 50% annual growth for the foreseeable future.
Tesla had to cut prices by 25.1% in 2023 to support demand, and electric vehicle prices fell another 9% across the industry in the first three months of 2024.
Price pressure will only increase as a result of the increasingly competitive landscape. Most Western manufacturers will struggle to match the production costs of China-based producers BYD, for example, which just launched an entry-level EV with a price tag of $9,700. In response, Tesla recently unveiled plans to release its own entry-level model in 2025, which could start at $25,000.
But selling cars at that price will put pressure on Tesla’s profit margins, so the best path forward is to build other businesses to complement its electric cars.
Enter the robotaxi and FSD software
Tesla is preparing to unveil its robotaxi in August. This is a fully autonomous car specially designed for rides (think… Uber (NYSE:UBER), except without the human driver). However, its success depends entirely on the widespread release of the company’s FSD software.
Musk says customers have driven more than 300 billion miles with the latest version 12 of FSD software. But it remains in beta mode, meaning the human driver must be ready to take the wheel. However, Ark thinks FSD could eventually win regulatory approval, based in part on its safety results to date.
According to data published by Ark, Teslas in FSD mode crash an average of once every 3,200 miles, compared to the U.S. national average of one crash every 200 miles. In other words, an autonomous Tesla could be sixteen times safer than the average American driver.
FSD could transform Tesla’s economics
Musk wants to create a ride-hailing network within Tesla, where the company can use robotaxis 24 hours a day to generate revenue. Uber spent $16.6 billion on paying its human drivers (its largest expense) in the last quarter alone, so if Tesla can eliminate those costs, its taxi service will yield a very high profit margin.
But Tesla will also sell FSD software on a subscription basis to owners of its EVs, and Musk has floated the idea of ​​licensing it to other automakers as well. Software-as-a-service often comes with high gross profit margins — sometimes as high as 80% — so this could be a game-changer for Tesla’s bottom line, especially as the EV price war heats up.
Ark thinks Tesla will generate $1.2 trillion in revenue by 2029, with 63% of that coming from its robotaxi business alone. Electric vehicle sales will fall to just 26% of the company’s total revenue, compared to 81% today.
That shift could boost Tesla’s profitability, which Ark’s modeling suggests could result in earnings before interest, taxes, depreciation, and amortization (EBITDA) of $440 billion by 2029. A whopping 86% of that is expected to come from the robotaxi segment.
Ark’s models are very ambitious
Wall Street estimates that Tesla will generate $98.4 billion in revenue by 2024. To meet Ark’s forecast of $1.2 trillion in annual revenue by 2029, the company will need to grow 64.9% (on average) every year between now and then.
Remember, Musk himself wants Tesla to grow at only 50% per year over the long term, and the company is currently significantly underperforming that goal. From that perspective, Ark’s models seem very ambitious.
Additionally, Uber has 149 million monthly active users on its platform, and has booked $72.5 billion in rides over the past four quarters. So even if Tesla overtakes Uber to become the world’s largest taxi service, those $72.5 billion in annual bookings won’t do much to boost revenue to $1.2 trillion.
Simply put, I don’t think Ark’s models will reflect reality in 2029. Please note that neither the robotaxi nor the FSD software have actually been approved by regulators. Even if they get approval, there’s no telling whether people will actually adopt them in the volumes needed to meet Ark’s financial forecasts.
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Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds and recommends positions in BYD Company, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.
Tesla makes money selling electric vehicles, but 86% of its revenue could soon come from this. was originally published by The Motley Fool
