Tesla's Autonomous Driving Narrative Has Hit A Brick Wall

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About: Tesla, Inc. (TSLA), Includes: F, FCAU, GM, GOOG, HMC
by: John Engle

Summary

Tesla has relied on its own good PR, credulous media, and bullish analysts to fuel a narrative of leadership in autonomous driving, even as Google's Waymo and GM storm ahead.

Development of Tesla's Autopilot continues to lag its own guidance by a wide margin; the latest software update excludes Autopilot V9 and its long-promised full self-driving features.

Businesses and automakers have been partnering with the real leaders in autonomy, with SoftBank and Honda recently making big bets on GM's Cruise system.

Tesla is already behind the leaders and is only losing ground; the company's carefully crafted narrative is facing increasing skepticism.

Tesla's biggest bulls hang their growth stock valuations on autonomy and "transportation as a service;" reality will soon force harsh downward revisions of those valuations.

Tesla (TSLA) bulls love to talk about Tesla's leadership in autonomous driving. Here's the thing: That "leadership" is just a mirage. Tesla's supposed leading edge autonomous driving technology has never been more than a carefully cultivated narrative, one that flies starkly in the face of reality.

The fact is, by virtually any serious measure (and according to virtually every serious subject matter expert), Tesla is way behind Google's (GOOG) (GOOGL) Waymo division and General Motors' (GM) Cruise program. But that has not stopped Tesla from relentlessly pumping the promise that its increasingly sophisticated driver assist system, misleadingly dubbed Autopilot, is just a few steps away from genuine full self-driving ("FSD") capabilities.

Unfortunately for Tesla and Elon Musk, the company's loquacious and mendacious CEO, more and more commentators, analysts, and consumers are getting wise to what is really going on.

As Tesla's autonomous vehicle leadership narrative knocks against an increasingly hard wall of incredulity, its tech stock valuation will be an inevitable casualty.

The Latest Autopilot Pump Goes Flat

Tesla and Elon seem to turn to a standard playbook whenever the company's shares are falling or bad news takes the spotlight: take to social media to promote a new technology that is "right around the corner."

The latest example of this playbook in action came on October 4 and 5, when Tesla released a series of nuggets related to Autopilot, including safety data and a long-awaited software update to its fleet, complete with slick explanatory videos.

The latest blitz received an uncharacteristically flat response from the public and the market. Evidently, glitzy presentation and the addition of some Atari games to its vehicles were insufficient distraction from the ongoing self-inflicted crisis between Elon and the SEC. It also did not help that the Autopilot safety report came under immediate and stark criticism from a range of news outlets and analysts.

New Autopilot Delayed Again

Making matters worse was the fact that the Version 9 software update failed to include Autopilot Version 9. In a tweet on October 5, Elon offered this comment by way of explanation for the latest delay:

V9 moving to wide release now. Holding back Autopilot drive on navigation for a few more weeks of validation. Extremely difficult to achieve a general solution for self-driving that works well everywhere."

Evidently, Tesla is still finding it difficult to get its self-driving functions to work. That comes despite Elon's claim in June that FSD features would be enabled in August. Of course, this is just one in a long series of delays in which Tesla repeatedly pushes back Autopilot updates generally and FSD elements in particular.

GM: Cruising Forward

The delay to the latest Autopilot update may carry additional sting in light of another embarrassing loss: On October 3, Consumer Reports released its ranking of automated driving systems, which placed Tesla Autopilot behind Cadillac's GM-powered Super Cruise system.

GM has racked up a number of other major coups in recent days. Its most recent win actually came at the expense of Waymo, which both GM and the experts view as its most serious rival in the autonomous driving race. On October 4, it was announced that Honda (HMC) had turned away from a potential partnership with Waymo in favor of investing $2.8 billion into GM's autonomous vehicle unit.

Waymo: No Longer Way Out Ahead

GM is clearly fighting hard to catch Waymo, which is still thought to hold a narrow technological lead by most of the expert community.

But Cruise appears to be catching up fast, buoyed by a deluge of investment from a growing number of partners. Honda has now punched the biggest ticket in favor of Cruise, beating out SoftBank's investment of $2.25 billion in May.

Of course, Waymo is not without resources to help extend its lead. It has Google's deep pockets backing it, as well as a raft of automotive partners including Jaguar and Fiat-Chrysler (FCAU).

Tesla: Autonomy on a Shoestring

Then we have Tesla's ongoing efforts to build its own FSD functions. Tesla has no development partners. It is all on its own and, at this stage, any innovative or unique technological and software advantages it may once have had in FSD have long since eroded to nothing.

Going forward, Tesla's situation can only get more dire. Ultimately, it is a battle of resources that Tesla cannot hope to win. The upstart EV maker spends a larger percentage of its budget on R&D than do other automakers, but that means little in this situation. In 2017, Tesla's total R&D spend came to $1.38 billion.

The cash-strapped Tesla has no means of investing much further. Not that it would matter, given that GM has pulled in $5 billion from Honda and SoftBank (OTCPK:SFTBY) to fund its autonomous driving program, in addition to the billions of its own capital it has allocated. Any investment Tesla allocates to autonomous driving technology will be a drop in the bucket compared to the deluge of cash pouring into GM, Waymo, and a few other automakers still making a go of their own homegrown programs, such as Ford (F).

The "smart money" of autonomous driving, i.e. the companies making big allocations to the technology, have weighed Tesla in the balance and found it wanting.

Tesla's Narrative is Going Off the Road

Tesla bulls argue that the company's staggering $50 billion valuation is justified because it is more a tech company than an automaker. Yet it is the legacy automakers like GM and genuine tech giants like Google that are storming ahead on technological advancements even as Tesla struggles to manage its comparatively minuscule production and supply chain.

Meanwhile, the idea of "transportation as a service" ("TAAS") has been gaining traction among FSD watchers. Some analysts have gone so far as to claim that Tesla will not simply be a major player in the TAAS space, but the dominant one. This notion is at the core of Ark Invest's $4,000 price target. While a few other analysts would go that far, many do ascribe lots of value to Tesla's future in TAAS. For example, Morgan Stanley's (NYSE:MS) Adam Jonas, ascribes a third of his $291 price target to Tesla's notional future TAAS vertical, which he has dubbed "Tesla Mobility." Yes, Jonas, a real-life Wall Street investment analyst, sees a currently fictitious business division as worth $95. Sure.

Here is the rub: When money managers and the investing public alike realize that Tesla is just another automaker with an inferior FSD technology, the impact on the share price will be profound. Fresh talk about near-term profits or Model Y production will be insufficient to justify Tesla's share price.

It is only a matter of time before the market wakes up to the reality that Tesla has already lost the autonomous driving race.

Disclosure: I am/we are short 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.