Elon Musk has made autonomous car driving one of the key focus areas of Tesla (NASDAQ:TSLA) cars. His strategy differs from Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) "driverless" cars where a Tesla vehicle driver will still be behind the wheel but can activate "Autopilot" for large parts of the drive. Musk believes this approach is more feasible from a technical and regulatory perspective than a completely non-driver based model.
Our research indicates that the Autopilot initiative is more of a reality and in full blown execution mode than a pipe dream. The below chart outlines key hires, the organizations they have been hired from and the roles of the personnel to execute on the Autopilot initiative.
The hires are from other peer auto manufacturers, semiconductor companies, auto part companies, universities, research organizations, internal moves and eclectic places like GoPro (NASDAQ:GPRO). These new hires go along with addition of Autopilot support duties across existing teams such as hardware engineering and infotainment systems. The hiring is likely to continue since there are at least 11 other open job positions to support the Autopilot initiative.
While other car makers such as Nissan (OTCPK:NSANY) have also been actively executing on autonomous vehicles, Tesla's focus and track record on software execution (e.g. Over the Air software updates) and integration with their infotainment system could make the Autopilot capability compelling to car owners. Software driven cars are also considered to be safer than human driven cars. Research has estimated accident related savings of about $400 billion from autonomous vehicles. These savings will translate to cheaper car insurance costs which will in turn lower the total cost of ownership of Tesla cars.
Tesla's autonomous driving capabilities are yet another reason (along with the Gigafactory optionality) investors need to utilize a probability based method to valuing Tesla along with traditional DCF methods to understand all the adjacent areas that the company can grow into and justify its high valuation. Patrick Archambault's team from Goldman Sachs, who covers Tesla, outlined an option scenario based model in March 2014. He outlined 5 scenarios and a probability weighted valuation method across all scenarios to arrive at a price target of $200 (10% lower than the price of July 8, 2014). The details are below.
The "Elon as the Maytag Repairman" scenario assumes EVs becoming a convenience like consumer durables. In the "Maytag Repairman" scenario, the Goldman team had 2025 forecasts for Electric Vehicles at 3% of total vehicles and Tesla's share at 55% of total electric vehicles coming to total unit sales of 1.8M unit sales. The "Maytag Repairman" valuation for that scenario was $329 for only the automotive business. In contrast, the base scenario for 2025 assumes unit sales of 764,000 and a current target stock price of $119 for the automotive business.
Presumably, the above probability scenarios do not assume the convenience of autonomous driving. However, an autopilot mode could provide the convenience factor that most drivers are looking for and be actually like the "Maytag Repairman / Dishwasher" scenario. Just as the consumer of today wonders how previous generations managed without dishwashers, similarly, the drivers of 2025 will wonder how the previous generations managed without Autopilot. Accordingly, we revised the probabilities outlined in the Goldman model and showed the effects on the valuation to account for post autonomous driving convenience in the below model.
We increased the probability of the "Maytag Repairman" scenario from 8.3% to 39.2%, reduced the base case scenario from 50% to 39.2% and the downside scenario from 25% to 5%. The revised probabilities increases the aggregate weighted valuation from Goldman's estimate of $180 (just on the automotive business) to $255. When we add the $20 grid storage option value, then the total valuation comes to $275.
The probability was revised to 39.2% for the "Maytag Repairman" scenario to give an equal probability to that of the base scenario (also 39.2%). We kept the "Steve Jobs" and "Henry Ford" scenarios the same probability as the Goldman model. As a result, the downside scenario reduces from 25% to 5%. We also believe the downside scenario reduction makes intuitive sense, given the evidence we have of the organization ramp up in the Autopilot groups.
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