Will Tesla Be Demoing An Uber-Competitor?

| About: Tesla, Inc. (TSLA)
This article is now exclusive for PRO subscribers.


The most common theories for Tesla’s mystery product announcement seem unsatisfactory to me. They don’t make sense. I explain.

The theory that makes more sense to me is for Tesla to demo a ride-sharing service using existing Model X vehicles.

When this service would scale, in 2018 and beyond, it would be with other future Tesla vehicles, including Model 3 and that utility van.

Right now, Tesla might be in a position to demo the ride-sharing logistics software, showing people being picked up and dropped off.

A positive reaction to such a demo, could provide an excuse for Tesla to raise much-needed money again, sooner rather than later.

We're a day away from finding out what Tesla's (NASDAQ:TSLA) mystery announcement is about. It was postponed from Monday to Wednesday, all per Elon's famous tweets.

The ether has been filled with theories as to what this mystery announcement is all about. None of these theories I've read has been sitting well with me, because they don't make enough sense. The more popular theories that have been circulated on the Interwebs seem to be:

1. Autopilot 2.0.

This appears to be the most popular theory. There certainly are some reasons to believe changes to Autopilot are coming. For example, the issue with the German government, and the fact that there are frequent software updates to Autopilot happening all the time anyway.

The problem with this theory is that it explains too much. Why do you need to have some sort of special announcement for a new software release, especially when it's only incremental to something you already have? And if legal issues in Germany cause you to change the name "Autopilot" to something else, you would do it quietly and without fanfare - not in an announcement that suddenly needed two extra days of tweaking.

Furthermore, while it is well-known that Tesla has broken with its Autopilot supplier - Mobileye (NYSE:MBLY) - one would think it would take much more time to be ready to demo a new product from a new supplier. And why would you tout this solution now, causing some would-be customers to hold off a purchase this quarter or next, in favor of something that wouldn't be available to the consumer until many months or years from now?

So I don't quite buy that Autopilot 2.0 is a big deal warranting this kind of an announcement build-up. It doesn't make sense to show it right now.

2. A new model, such as Model Y.

We all know that the crossover-SUV version of the Model 3 - to be called Model Y - will eventually arrive. However, Tesla already has a problem persuading the market that the Model 3 will be available on time, in any meaningful quantity to non-employees. The company has promised it will arrive shortly after July 1, 2017.

To show the Model Y now - even as a rendering in a fancy video or whatever - would only serve to undermine current Model S+X sales and Model 3 refundable deposits. If it were a good idea to show Model Y at this point, why stop there? Why not show multiple cars that would be arriving after the Model Y at this time as well?

If Tesla did that, it would most likely put even further pressure on current sales. So I don't quite buy the idea that Tesla wants to show Model Y at this point. It doesn't make sense.

Another motive: Lift the company's valuation, and raise money

Back on February 11 on the 4Q conference, Tesla talked about the lack of a need to raise more money. That promise took only three months to break, because of the predictable Model 3 reservations hoopla provided the excuse.

But hey, it worked!

Tesla got away with breaking that promise, because people bought the idea of a very successful new product, that warranted another $1.7 billion in financing at that time.

But we said above: Tesla can now ill-afford showing a completely new model whose delivery is years into the future, such as the Model Y. With the Model 3 not being even close to delivery - and perhaps being years behind schedule in any meaningful definition of quantities delivered to non-employees - Tesla probably can't play this trick one more time. Not right now anyway.

However, what if it's a completely different type of product? Or maybe even a service? What's the biggest, fattest target Tesla could set, in order to hope to goose its valuation?

Uber (UBER).

$63 billion reasons worth.

Adam Jonas of Morgan Stanley started this talk about Tesla launching an Uber-competitor little over a year ago, and Tesla has answered on the quarterly conference calls effectively with "no comment."

Meanwhile, Elon has talked about a minivan-type service that could be used for urban and suburban ride-sharing of sorts. The car itself would be built on top of a Model X platform, but without those unreliable doors, and with a more square "top hat" in order to fit more people and luggage. In other words, it would be more like a normal van.

Here is what would make sense: Let's say Tesla has been working on the software for such a ride-sharing service. This software would be used to optimize the routes, pick-ups, drop-offs, driver availability and consumer demand.

If Tesla has done the work on this kind of software, it would be in a position to demo this kind of service by using an existing vehicle - Model S and Model X - while stating that the eventual mass deployment of the service would take place with future vehicles, i.e., the un-named non-Model-X passenger van, Model 3 or Model Y. Demoing this on the existing Model X today would simply be a way to get people excited about the company and the stock.

Tesla could simply say something like: "We intend for this ("Tesla Mobility") to launch as a service in 2018 with the Model 3 and other vehicles after that, as soon as they enter mass production. We will conduct limited field trials starting in 2017 as we ready the service for mass deployment in 2018 and beyond."

That might be enough to get the stock to pop, in turn justifying a much-needed capital raise far earlier than Elon implied in his recent Tweets. Basically, "Hey, we had no idea how excited people be for this service, so now we decided to raise money earlier in order to be able to roll it out on an accelerated basis. This includes funding for our ride-sharing-optimized utility van."

It would be natural for Tesla to demo this in a Model X as opposed to the Model S, given the size and the "wow" effect of the Model X doors. The Model X would be a bad one to deploy in practice, given its slow doors that are unreliable and have a tendency to dent cars parked next to it. That's why an entirely new van needs to be designed in order to enter rational commercial service. Alternatively, you could use a Model 3, which is at least going to be relatively inexpensive, and most likely be available before the utility van.

However, for demo purposes right now, the Model X will do the job perfectly well. So how would you perform a demo of this service?

First of all, forget about driverless operation. Moving 39 feet in and out of a particular garage at very slow speed is fine, but this driverless operation is not ready to drive on public roads. As a result, for the foreseeable future, we would be talking about having a driver behind the wheel, just like Uber and Lyft (LYFT) today.

Tesla could produce a slick video of Model X cars driving around a neighborhood, picking up and dropping off people at houses, offices and just plain sidewalks. Elon could then give a presentation basically outlining the vision for where all of this is going, with a video like that as support.

Perhaps this might also be the right opportunity to announce a VP of Tesla's taxi service ("Mobility"), Adam Jonas, then formerly of Morgan Stanley.

Okay, that last sentence is perhaps not necessary for the equation to solve, but if my theory is right, maybe we are on the cusp of Adam Jonas's August 2015 prediction to be vindicated.

What about the long term? What would "Tesla Mobility" or whatever they would call it, mean for profitability?

It's far from clear to me that this would be a kind of service where Tesla would ever make money. The business model is unproven, and people are still struggling with the prospects of Uber or Lyft making money (they are privately held, so we have little or no insight into their accounting). In other words, this is a complex topic we would have to cover in future articles, assuming such a Tesla service does indeed get announced.

Uber and Lyft ostensibly have the advantage of not having to pay for automotive capex. Would Tesla's model depend on this as well? Would Tesla finance/own the vehicles? Or would they assume that people who buy a Model 3 or some other future Tesla vehicle, would pay for their cars and therefore be able to operate a business model similar to Uber?

Of course, those two models are not mutually exclusive. Tesla could do both, in parallel. However, if you can't make money with either approach, then in the long run, it doesn't help the company.

But what about the short run? Yes, I think that in the short run, if Tesla were to demo or otherwise announce "Tesla Mobility", it has the potential to be positive for the stock - at least temporarily.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was long TSLA via stock and options. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.