After writing my article on autonomous auto stocks for 2017 and beyond that can be found here, I caught some heat for not including Tesla (NASDAQ:TSLA) in the basket. Instead of shares in Tesla for the automaker component, I chose Ford (NYSE:F) and Volvo (OTCPK:VOLVY) and had numerous commenters sharing their reason why my failure to choose Tesla was ill-advised. One commenter suggested all automakers would eventually be Transportation-as-a-Service (TaaS) providers, and there was likely room for three such providers. The commenter didn't think Ford would make it. Some suggested Tesla would attract all the best engineering talent, leaving the other automakers with B- and C-rated engineers.
Some already had their autonomous car bets made with positions in both Tesla and Nvidia (NASDAQ:NVDA) surmising those will be the big winners. They have good company. Trip Chowdhry of Global Equities Research summed up his thesis for autonomous transportation and transportation in general going forward as Winners: Tesla, Nvidia; and Losers: Mobileye (NYSE:MBLY) and all traditional automakers. All traditional automakers? That's basically every automaker on the planet besides Tesla and maybe Fisker and BYD (OTCPK:BYDDY), that's a lot of losers. Trip is a talented analyst. I've followed him for many years (see his ranking on TipRanks here). Even for him, that's a pretty bold statement. It got me thinking, is Tesla's lead in the race for autonomous cars so great that the race is effectively over? I wanted to find out if I was using traditional methodologies too much, overthinking my picks and missing out on the bigger winner, Tesla.
Autonomous Car Adoption
How many self-driving cars will be on the road at X date in the future is a moving target. Wait a day, and you'll see another estimate. That being said, I do tend to like Business Insider's forecast seen here:
Now that we have at least an estimate for the installed base of cars with self-driving features, let's look at what percent of the market Tesla has. Most Tesla Model Ss produced after October 2014 had the technology that would allow Tesla to "turn on" autopilot in October of 2015. We know Autopilot 2.0 will be an option for some Teslas starting December 2016. For these purposes, let's assume Autopilot 1.0 is a "self-driving feature." We know Tesla has sold an additional 21k Model Ss in the second half of 2016 so far. All this adds up to about 99k Model Ss on the road with some level of autopilot functionality and 10k Model Xs all that have autopilot. Per BI in 2016, there are about 250k on the road with self-driving features, so Tesla has 44% of the market. 44% of anything in the automotive space is absolute domination. There are over 30 car companies in the world, even the biggest, Toyota (NYSE:TM) has just a 15% overall share.
Elon Musk has told us many times Tesla doesn't have a demand issue, it has a supply issue. How will this supply issue affect its standing in the self-driving installed base? It is currently building about 2k cars a week looking to ramp that up next year. For 2017, I've seen estimates as low as 150k cars and as high as 370k (assuming TSLA gets all the Model 3s it wants to be built). I face a conundrum here. I don't think Tesla will get the Model 3 out in late 2017, but if I don't include it and the company gets it done, I'll look silly. I think an estimate using an expected value calculation is the right call for the Model 3. Tesla itself said 100k to 200k, so I'm going to assign a 10% chance it does 200k, 10% 150k, 10% 100k, 10% 75k, 10% 50k, 10% 15k (if it gets a few out for PR reasons) and 40% it does 0 for an expected delivery of 59k. That makes my estimate for 2017 deliveries at 210-230k, about smack in the middle of all the estimates out there. Using the midpoint, that would mean 330k Teslas on the road with self-driving functionality by year-end 2017 vs. an installed base of 900k. That's 37% of the installed base, which is still incredible for just one tiny little automaker.
2018 is when things get interesting, especially if you think Tesla can build its 500k cars in 2018, which is the goal it set for itself (moved two years up from 2020) this year. I'm going to go a bit conservative here and go with 350k vehicle deliveries in 2018. I think if you caught Musk on the street, he'd agree even this number would be quite a feat. These figures would imply 680k Teslas with self-driving functionality vs. an installed base of 2mm or 34% of the total. Yeah, that's still pretty impressive. The "Tesla Wins" camp is running away with this thing. Tesla is going to be THE autonomous car company for the next two years at least, that much is clear.
2019 going into 2020 is when autonomous cars start to ramp. Let's look at some of the industry news bits:
- NuTonomy to expand self-driving taxi service to 10 cities around the world by 2020 (Source: Yahoo News)
- Delphi (NYSE:DLPH) and Mobileye to provide off-the-shelf self-driving system by 2019 (Source: TheVerge)
- Volkswagen (OTCPK:VLKAY) expects first self-driving cars on the market by 2019 (Source: Focus)
- Ford's head of product development: autonomous vehicle on the market by 2020 (Source: Auto News)
- Baidu's (NASDAQ:BIDU) chief scientist expects a large number of self-driving cars on the road by 2019 (Source: Quora)
- First autonomous Toyota to be available in 2020 (Source: Wired.com)
- Nissan (OTCPK:NSANY) to provide fully autonomous vehicles by 2020 (Source: Nissan Motors)
- Sergey Brin plans to have Google (NASDAQ:GOOG) (NASDAQ:GOOGL) driverless car in the market by 2018 (Source: Driverless car market watch)
There is a clear trend here. Most players in the space plan on really ramping after 2019 going into 2020. Let's assume Tesla can hit its 500k goal after 2018, in 2019, it would have 1.2mm autonomous capable cars on the road vs. a 4.4mm installed base or 27% of the global base. Then, in 2020, Tesla would have 1.7mm autonomous capable cars vs. a base of 10mm or 17% of the global base. You may think that Tesla is starting to look less impressive. That's not really the case when you factor in that automakers make about 75mm cars a year globally. Tesla will still have a larger percentage of the autonomous fleet in 2020 than Toyota's percentage of the entire global automotive fleet at around 15%. With that being said, I do think 2019-2020 is when Tesla's chokehold on the autonomous vehicle fleet will start to come under pressure. Tesla needs to figure out how to ramp to Ford, Nissan or Honda (NYSE:HMC) type production levels to maintain its dominance. Is that even possible?
Can Tesla become a bulge automaker?
For Tesla to become a massive automaker as the likes of Ford, Nissan or Honda, it's going to need a whole lot of batteries. You can check that box off as it has started its first Gigafactory, and when that factory is running at full steam, it will produce 1.5mm Tesla battery packs per year. The Tesla Gigafactory 2 will be in Europe; its location will be announced in 2017, and it will house both a battery plant and a vehicle assembly plant. The scale of the battery factory will support another 1.5mm Tesla battery packs although it's unlikely the auto assembly wing will be able to produce automobiles at such levels.
Elon has plans for a Gigafactory 3 somewhere in the US unlike the Gigafactory in Europe. If Tesla can get just two Gigafactories built, it will have the batteries at least to produce vehicles at about the same scale as Suzuki (OTCPK:SZKMY) (Suzuki made about 3mm autos in 2015). In fact, Tesla hopes to have the Gigafactory running flat out by 2020, supplying 3X the number of batteries it needs unless it can ramp production into 2020 further. These batteries will be used on the Tesla Power Walls and other power containment devices it has in its pipeline, but it sure seems that Tesla can ramp its auto production past the 500k units per year in 2019 and 2020. At the very least, it will likely have the batteries to do so.
What does all of this tell us? What it tells me is Tesla and Elon Musk need to thread a proverbial needle around 2018 to the 2021 time slot when they still have the best autonomous tech and can potentially ramp their production to compete with the big boys.
TaaS and the automobile companies that can survive it
I want to bring up a comment from my last autonomous article that I think is relevant to this article.
"Self-driving cars is a trend that obviously we all want to ride.
Yet, as automakers become transportation-as-a- service providers over time, and due to inherent network effects of TaaS, regional oligopolies of about three players will form, with most of the incumbent being pushed out of business.
IMO the chances for Ford to be one of the three US winners are slim.
The only obvious winner at the moment is TSLA. NVDA CEO stated in the last earnings conference call that TSLA is four years ahead of the competition, and I don't think there are many people with better knowledge of the self-driving industry than NVDA CEO.
But anyways, good luck with your bets
(I'm long TSLA and NVDA)."
The above comment is from Bizlike Investing, a contributor for SA
From what we have seen so far, Bizlike is likely right in his or her assessment regarding Tesla being ahead of the competition (I think three years, not four, potato potahto), and I too am fully on board with their TaaS assumption. Bizlike is probably right, and there is probably room for few regional oligopolies and Tesla needs to make darn sure it's one of those. It's clear that this was Elon Musk's vision when he suggested your car could be driving around making money for you when you weren't using it. I envision a future where some will own cars and they don't ever rent out. Some might rent theirs out a bit just to cover some costs and some might try and operate a business, much the same as some Airbnb (Private:AIRB) entrepreneurs out there have with units.
I think a lion's share of us will just use the transportation services when we need it much like how most of my friends in SF or NY don't have cars. TaaS will just increase the distance you are away from "stuff" that you wouldn't need to own a car anymore. Live 10 miles from a city and your office is six miles away? Probably won't need to own a car anymore. Live 50 miles from work and 75 miles to the closest airport? Probably still going to need to own a car. But who knows? Maybe you won't even then. In an established TaaS future, a ride will cost the energy used, vehicle depreciation and some level of return for the owner. Perhaps car ownership will be only for collectors if the infrastructure becomes built out enough. When you think about it, living in a city just increases your proximity to "stuff" and reduces your transportation needs. As TaaS ramps up, longer distances to "stuff" will be cheaper with transportation services vs. car ownership.
But back to Tesla, it needs to thread this needle so it can be one of these oligopolies, and at the moment, it is coming from a position of power. After looking at all this data in greater detail, it's become apparent to me Tesla needs to execute in the next 4-5 years so as to not lose this advantage. As of right now, it has the advantage, so what can the company do to keep it and who would take it away from it?
Who's the competition and how can Tesla fight them?
I think Uber (Private:UBER) understands the risk of Tesla to its model best. If Tesla can produce enough self-driving cars itself, it could render Uber obsolete. This threat probably has something to do with Travis Kalanick's offer to buy 500k fully autonomous cars from whoever can produce them (the offer went to Tesla first, and Elon didn't pick up the call allegedly). If Ford or GM (NYSE:GM) gets its tech right on the autonomous car front, could they bust out a lot of 500k vehicles? You bet your bottom dollar they could.
Lyft (Private:LYFT)/GM is also a potential competitor, and the first mass produced autonomous cars by GM will almost certainly operate on the Lyft network. GM flat out wanted to buy Lyft. The TaaS future is not lost on it. So we have GM connected at the hip with Lyft and Uber out there waiting to buy a whole lot self-driving cars from whoever can get them built. Where does that leave Tesla? All roads lead to Google in my opinion. Wall Street has often speculated it might make sense for Google to purchase Tesla entirely. This outright purchase of Tesla may still happen, but I think some robust partnership with Google is more likely. The Google self-driving car is pretty. Well it's pretty childish to be honest, it almost looks like a toy.
VS. Tesla S with Autopilot 2.0:
In which would you rather ride around? Tesla has seamlessly integrated all the sensors into the Model S. Think the Model S doesn't have LIDAR because it lacks that big dome on the roof? Think again, it's integrated neatly into the rearview mirror assembly. The Google car may make sense as a city driver, but once you want to go somewhere other than just within the city, I'd bet most of you would rather ride in the Tesla.
Another reason Tesla and Google would be a match made in heaven has to do with the data. Tesla has loads of it, and Google wants it. As of November 2016, Tesla has 1.3 billion miles of Autopilot data vs. Google with 3.5 million miles of data (source: electrek.com). Here how I see the presented situation; you have Tesla with auto building expertise and loads of data, and you have Google with data processing capability and loads of users. Combine the two into a TaaS service and both Uber/whomever and Lyft/GM would be shaking in their boots. Google could just include a car summon feature into Google Now, and overnight 1.4 billion users would have the ability to summon a car, they wouldn't even have to build another app and try and get downloads.
Much has been said about Tesla needing a capital injection. Musk has said the company doesn't need it, but Wall Street is unanimous it thinks TSLA needs the capital. Tesla's capital needs present Google with an opportunity. It could supply this capital as part of a deeper partnership and gain a vehicle manufacturer in its corner. Google would have its vehicle manufacturer and the best autonomous tech, and Tesla would have its capital and the best network in the world, effectively becoming one of the oligopolies that Bizlike was talking about overnight. All they would have to do after getting the capital would be to execute on the production ramp; easier said than done of course. Google has over 70 billion in cash on its balance sheet if it is serious about autonomous cars, and it certainly appears it is. A large investment in Tesla would be one of the best ways to accelerate the process.
Tesla has a lofty valuation at 32 billion-ish at the time of writing, but Uber is worth 62.5 billion. Buying 500k autonomous cars would be a capital-intensive proposition but if Tesla and Google let Tesla owners on to their network, the car owners themselves could bear some of that burden. Google isn't the only Silicon Valley company with a lot of cash and a large network, You could probably make the same argument Apple (NASDAQ:AAPL) would be a natural partner with Tesla although Apple doesn't have quite the autonomous car program that Google has (we really have no clue how far along Apple's is). After looking at the issue more, I think Tesla needs to partner with somebody to get through the 2019-2021 autonomous car boom. If it gets somebody on board soon, it should be able to navigate it quite effectively.
After looking at the facts it becomes apparent, Tesla is pretty far in front in the self-driving car race. It is going to enjoy the #1 stop with almost no competition for the next two years, after which it'll need to ramp production to keep the spot. I think in the US at least you could see the TaaS oligopoly look like Ford/Uber, GM/Lyft, and Tesla/Google or Apple leaving the other automakers struggling to remain relevant. If the level of car ownership in the US goes down in the future, there simply won't be a need for as many car brands. TaaS is all about scale. In a TaaS future, there will be fewer, bigger auto companies. Think about when you order a Uber or Lyft do you care what kind of car comes? You don't. Usually it's a Prius or some econobox, or if you order a larger car, some efficient SUV, and you always have the option of ordering a big ole suburban. If cars become less of a status symbol and more of a commodity, it will become more difficult for automakers to differentiate themselves. It will become more about who can provide the best service, not manufacture the best product.
At the end of the day, the most expensive part of your Uber or Lyft ride is still the driver. When the drivers are gone, rides will become even more reasonable. Whether it is a fleet of Tesla Model 3s or a fleet of Ford Fusions, I don't think people will care much. Just as long as there are lots of them, they are autonomous, and they get them where they need to go cheaply and safely. If Tesla can ramp production, I'm confident it will be one of the survivors in this massive transportation shift we are about to witness. If this happens, could Tesla command a Uber type valuation? I think it could, but an investor would have to be confident the TaaS autonomous outcome will happen.
Tesla deserves a spot in my autonomous car basket. It should have been in there in the first place. I'd argue you could include it or replace Ford with Tesla. I still like Volvo because of the autonomous shipping/trucking aspect, and I think Volvo stays. And if Tesla can capture a big partner in Google or Apple, then you'll truly be able to buy TSLA's shares with both hands. But if a deal is made, you might not get to chance to. A partner like that nearly assures Tesla a spot as one of the TaaS providers for decades to come. At the end of the day, I don't think Tesla can be beaten, at least not any time soon. I think the most an automaker could hope for is to compete with it, and to compete with Tesla, they'll need to step on the gas. Tesla has quite a head start.
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Disclosure: I am/we are long NVDA, F, DLPH.
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.
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