Robotaxis – Bloodbath Incoming

Tesla will not have this market to itself.

• The idea that Tesla is going to make huge profits from robotaxis is already looking extremely challenged, as it is already way behind Waymo and now Uber, Lucid, and Nuro are teaming up to create yet another competitor.
• Uber has thrown Lucid a much-needed lifeline with a $300m cash injection and the promise to purchase 20,000 vehicles that will form the basis of its Robotaxi fleet launching in a US City in 2026.
• In my opinion, this is a fairly potent combination of the largest and best-known ride-hailing company, a high-quality EV maker and a top-tier provider of autonomous driving technology.
• The net result is likely to be high-quality vehicles that do a pretty decent job of ferrying people from one place to another, being sold in the app that has by far the most buyers of ride-hailing services.
• This adds to Waymo, which is already in multiple cities, Mobileye, which can navigate the chaos of Jerusalem, and Pony.ai, which is already extensively testing in China and can easily begin operations in the USA.
• This is very good news for Lucid, as although it has a lot going for it is struggling because starting-up vehicle manufacturing is very capital intensive, and it continues to burn cash like there is no tomorrow.
• The $300m is not very much when one considers the billions of cash it still needs to raise to hit positive cash flow and become self-sustaining, but the addition of Uber to the shareholder register gives it credibility and should make it easier to raise further funds in the future.
• It is also a vote of confidence in this little-known, but in my opinion, high-quality brand, which could help it raise awareness and grow market share.
• It is also another new entrant into the robotaxi space that Tesla has been assuming that it would have to itself, given that it thinks that it is a leader in autonomous driving.
• This is how it thinks it can charge $1 per mile for a service that it forecasts will cost $0.20 per mile to deliver, resulting in gross margins of 80%.
• If Tesla has the market to itself, then this is entirely possible as ride-hailing with humans costs $2 or more per mile today, representing an attractive proposition for ride-hailers.
• While I think that the cost point is arguable (I suspect it will be more like $0.3 per mile), I think that Tesla’s assumption on price is way off.
• This is because the market is going to be a bloodbath of brutal competition as consumers care more about getting from A to B and so will tend to go with whoever is the cheapest.
• Hence, the real price is not going to be $1 per mile but something closer to $0.35 – $.40 per mile as the large gross margin is competed away by a series of equally good offerings.
• This means that robotaxis will become a market where scale and efficiency determine who wins and I think that Tesla will have just as good a chance as everyone else of being one of those.
• However, it means that the revenue will be 1/3^rd of that predicted and the profits will be 85% or more lower than currently predicted.
• It is important to note that this makes no assumption for scale, and if a lower price makes the market much bigger and Tesla gets more rides as a result, then these assumptions are overly negative.
• However, it will be a low-margin business that relies on scale to cover its fixed costs and not the hugely profitable business that the market is currently expecting and paying for.
• This is why I remain pretty cautious on Tesla’s valuation and would prefer to look at something like Lucid (or Ouster, which I already own) as a way to invest in EVs and the autonomous driving transition.
• Lucid needs to raise more cash, but I think it is very unlikely that it fails to do so as it is majority owned by PIF of Saudi Arabia, which I think is very unlikely to let it go under.
• Instead, it is more likely to buy out the shares that it does not own, but with Uber now on board, this is looking like an increasingly unlikely outcome.
• I would be looking at Lucid, if I did not already have an iron in this fire.