Tesla – Leaky bucket

The assumptions do not hold water

• It looks like Tesla has been successful in raising money for its autonomous driving ambitions but I find its commentary to be somewhat misleading which combined with a total lack of hard data makes me wonder whether Tesla is going to make it in this space.
• This is not helped at all by Elon Musk’s belief in the exponential growth in the ability of AI which underpins both his confidence in his autonomous driving offering as well as his fear of robots.
• Tesla is raising around $1.35bn in convertible bonds and $650m in straight equity following on from a dismal Q1 where liquidity dropped sharply.
• Tesla will use the proceeds to continue the development of its autonomous driving offering which it sees as central to its strategy to become a $500bn company.
• The strategy is that millions of Tesla vehicles will be driving themselves around generating gross profits of $30,000 per year from which Tesla will either take a cut or own the vehicles outright.
• There are two supporting pillars to this strategy:
  • First, robotaxi economics: Tesla’s contention is that it will charge $1 per mile (ride-hailing costs $2-3 per mile today) which will cost it $0.18 per mile to operate.
  • Tesla estimates that its robotaxis will do 90,000 miles per year and last for 11 years giving 1m miles of useful life for the vehicle.
  • Assuming 50% empty miles, this gives revenues of $45,000 per year, costs of $16,200 and gross margins of $28,800 or 64%.
  • I have a few issues with these figures.
  • I don’t think that autonomous vehicles will charge $1 to go one mile, it will be much lower.
  • This is because at $1 per mile it will be much cheaper to own one’s own autonomous vehicle rather than rent.
  • Furthermore, with this much gross margin available there will be huge competition that drives prices down.
  • It is on this basis that Musk claims that a Tesla vehicle gets more valuable as it ages which the second market completely contradicts.
  • If he really believed this, he would be buying up all the cheap 2^nd hand Teslas available for his robotaxi fleet.
  • Second, autonomous driving: Tesla claims that it is miles ahead of everyone when it comes to autonomous driving, but at the same time, it declines to provide any data.
  • This superiority is based on the notion that it has solved the problem of machine vision.
  • Humans can drive to a standard of 1 fatality per 100m miles driven using just their eyes, leading Tesla to believe that machines can do the same using 8 cameras.
  • Consequently, it is using neither a high definition map nor lidar to help the vehicle “see”.
  • The issue as I see it is that while Tesla has access to far more data than everyone else put together, there is no evidence that it has solved the machine vision problem.
  • A study by MIT (see here) has provided some data which puts Tesla towards the bottom of the pack.
  • In this study, Teslas drove 112,427 miles in autopilot mode and suffered 18,800 disengagements or about 1 every 6 miles which is 1,846x more frequent than Waymo.
  • This puts Tesla way below the leaders in 20th position which, ironically, is not that far from where it was when it last published data in 2017.
  • In the last 6 months, most autonomous driving players have accepted that the problem is more complex than originally anticipated and have brought expectations of commerciality back to “some time in the next 10 years”.
  • By contrast, Tesla thinks that its vehicles will be feature complete in H2 2019 and that the will be able to drive with the occupant no longer needing to pay attention by the middle of 2020.
  • Musk is well known to pay fast and loose with timelines and so I suspect that there is zero chance of this forecast being met.
  • However, to be fair, his forecasts with regard to his vehicles have proven to be accurate, just arriving many years late.
  • Hence, I think Tesla will get there around the same time as everyone else.
• The problem for investors here is that meeting forecast on time matters a lot to the valuation of a company.
• The net result is that anyone making an investment decision based on Tesla’s figures is likely to be sorely disappointed.
• I still think that while Tesla started the race to electric vehicles, it is unlikely to finish it.
• This is because it seems incapable of generating any cash from the expensive vehicles it does sell, meaning that when the OEMs get up to speed with their electric vehicles, it is likely to be crushed.
• I think Tesla will end up being acquired by one of the big OEMs who will then use it as their own electric vehicle offering.
• The price paid could well be less than the company is valued at today and so I would steer clear of this fundraising.