Tesla's Latest Autopilot Update Is A Hit With Owners

Summary

• A new update to Autopilot has Tesla owners gushing.
• Conservative scenario: improvements to Autopilot will create more demand for Tesla's vehicles.
• Techno-optimist scenario: Tesla is on the path to full self-driving and the eventual demise of the auto sales business.

Tesla (NASDAQ:TSLA) owners are gushing about the latest version of Autopilot for Hardware 2 cars. One Tesla owner said to me that, with the new update, Autopilot “feels like a human driver.” On the Tesla Motors Club forum, an owner going by MikeH said that Autopilot is “now as good or better than” him at changing lanes on the highway. Dozens of comments on the forum are similarly effusive.

The update brings three major improvements:

• greatly improved lane keeping: a car now recognizes the lane that it’s in more reliably, and holds steady in the centre of the lane instead of “ping-ponging” between lane lines
• sharp curves and hills that previously confounded Autopilot are now handled with grace
• greatly improved automatic lane changes on the highway

Thomas Bensmann in Norway is one of many Tesla owners who has uploaded a video demonstrating the improvements:

Tesla’s Director of AI, Andrej Karpathy, said that the improvements are “a result of a fairly extensive rewrite” of the Autopilot software:

Over the past five months, Tesla has indicated that is has been reworking its Autopilot software stack at a fundamental level. In its Q3 2017 update letter, Tesla wrote:

Now that the foundation of the Tesla vision neural net is right, which was an exceptionally difficult problem, as it must fit into far less computing power than is typically used, we expect a rapid rollout of additional functionality over the next several months and are progressing rapidly towards our goal of a coast-to-coast drive with no one touching the controls.

This comment suggests that Tesla changed to a new neural network architecture as recently as Q3 or Q4 2017. In its Q4 2017 update letter, Tesla expanded on this theme:

The upcoming autonomous coast-to-coast drive will showcase a major leap forward for our self-driving technology. Additionally, an extensive overhaul of the underlying architecture of our software has now been completed, which has enabled a step-change improvement in the collection and analysis of data and fundamentally enhanced its machine learning capabilities. Our neural net, which expands as our customer fleet grows, is able to collect and analyze more high-quality data than ever before, enabling us to rollout a series of new Autopilot features in 2018 and beyond.

What we’ll have to watch for next is whether the rollout of improvements and new features is as rapid as Tesla has been hyping. If Autopilot version 2018.10.4 is followed by a long dry spell, that sucks for customers and investors. On the other hand, if updates as big as 2018.10.4 start coming on a monthly basis, my reaction will be something approaching awe. At that rate of progress, it isn’t too much of a stretch to imagine that Tesla’s cars will be capable of full self-driving at a superhuman level of safety by the end of 2019, as CEO Elon Musk predicted at NIPS in December and again at SXSW this month.

The conservative scenario is that Tesla will simply master advanced driver assistance, giving drivers a smoother and less cognitively taxing experience than anything else on the market. This will create more demand for the Model S, X, and 3, and will perhaps help to push Model 3 demand beyond 1 million units per year, as I’ve predicted.

The techno-optimist scenario is that Tesla will break into the autonomous ride-hailing market with the Tesla Network, a service that allows anyone to summon a fully autonomous car using an app. This may not come to pass. It is hard to predict the future. But if it does, the potential upside is staggering. Brett Winton, Director of Research at ARK Invest, recently put it this way:

This is the primary reason why I’m invested in Tesla: the chance to grab a significant share of an autonomous ride-hailing market that is worth trillions in market cap.

In its whitepaper on the matter, ARK Invest forecasts that the combined market cap of autonomous ride-hailing companies will be $7.5 trillion in 2025:

Capturing 5% of that market would mean Tesla’s market cap would increase to at least $375 billion, an increase of almost 6x from its all-time high.

Suppose that, due to network effects, the market is captured by “a relatively small number of companies”, as Brett Winton said, and Tesla is one of them. A 20% share of the market would put Tesla’s valuation at a jaw-dropping $1.5 trillion, an almost 23x increase from its all-time high. $5,000 invested at the stock price's peak in September would be worth $114,500 in 2025. Of course, investing in Tesla now, with a lower stock price, would yield an even better return.

This also only accounts for the Tesla Network's contribution to Tesla's market cap. Auto manufacturing, autonomous freight transport, and the energy business would also contribute.

What I especially like about Tesla as an investment is that if the techno-optimist scenario is too outlandish for you to stomach, you can fall back on the conservative scenario and still forecast a more modest but still respectable return. Even if full self-driving isn’t attained in the next 15 years, Autopilot will continue to improve and create demand for Tesla’s vehicles.

Model 3. Photo by Seungho Yang.

Disclaimer: This is not investment advice.

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.