The Tesla Network Is Dead

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About: Tesla, Inc. (TSLA)
by: John Engle
Summary

On March 6, Tesla removed all reference to the Tesla Network from its website.

The Tesla Network is meant to be an autonomous car service that would eventually compete with Uber and Lyft in the ride-sharing space.

Tesla has made big promises about its autonomous driving program, but it appears to be falling ever farther behind the leaders in the technology.

Tesla's valuation is based in part on future mobility-as-a-service revenues. These are unlikely to materialize anytime soon, if ever.

As analysts come to realize that the Tesla Network is not arriving soon (or perhaps ever), they will have to revise their price targets. Expect negative pressure on the stock.

A big part of Tesla’s (TSLA) growth story is built around the idea of the so-called Tesla Network, an autonomous vehicle service that CEO Elon Musk has claimed will compete with the likes of Uber (UBER) and Lyft (LYFT) in the ride-hailing sector. Thus, the March 6 update of the Tesla website comes as something of a shock to those investors who had been projecting big revenues from the Tesla Network in the near future. The updated website has actually removed all reference to the Tesla Network.

It looks like Tesla is quietly backing away from the grandiose Tesla Network claims, which could result in serious consequences for the company’s growth narrative, as well as its inflated share price.

A Sudden Reversal

The removal of all reference to the Tesla Network is both sudden and surprising. Tesla did nothing to telegraph the change. Indeed, during the Q3 2018 earnings call last October, Musk was still waxing lyrical about the capabilities and market potential of the Tesla Network:

“We absolutely see the future as kind of a shared electric autonomy, so that you’d be able to do ride-hailing or share the car anyway, you know sort of a long-term model that’s probably some combination of like Uber, Lyft and Airbnb. There will be Tesla dedicated cars for ride hailing and any customer will be able to share their car at will, just like you share your house on Airbnb. So, it’s a combination of those two models, I think is pretty obvious where things are headed long term. The advantage that Tesla will have is that we’ll have millions of cars in the field with full autonomy capability and no one else will have that. So I think that will end up putting us in the strongest competitive position long term.”

Musk offered further information about his vision for the Tesla Network throughout the earnings call. While his language was largely speculative, he went into considerable detail about how the business would function. Specifically, he envisioned a system whereby Tesla owners could link their vehicles to the service, allowing them to generate passive income. At the same time, the company would maintain a fleet of vehicles dedicated to serving Tesla Network customers.

Yet, when Tesla updated much of the language describing its self-driving technology last week, many of the boldest safety and functionality claims were either watered down or stripped out entirely. Also gone was this reference to the Tesla Network:

"Please note also that using a self-driving Tesla for car sharing and ride hailing for friends and family is fine, but doing so for revenue purposes will only be permissible on the Tesla Network, details of which will be released next year."

This may seem like an innocuous change, but that's far from the truth. Indeed, it could have very serious consequences for how the company is viewed - and valued - by the market.

Massive MaaS Dreams

Musk’s bold vision for self-driving vehicles and Tesla’s place at the center of an autonomous network, has been a core component of the company’s growth narrative, as well as its treatment as a tech company, rather than simply a niche automaker. Musk’s enthusiasm has proven infectious to many investors and analysts.

Among asset managers, ArkInvest has been perhaps the most excited about Tesla’s burgeoning leadership in the “mobility-as-a-service” (“MaaS”) space. The investment firm’s ultra-bullish $4,000 price target - which garnered extensive media coverage last year - is based in large part on its forecast of massive growth in Tesla’s MaaS business:

“Our $4,000 price target assumes that Tesla evolves from a hardware manufacturer with 19% gross margins to a company generating most of its profits from Mobility-as-a-Service (MaaS), a business that we believe will enjoy 80% gross margins. In the $4,000 scenario, our assumptions are conservative: We incorporate profits only from cars and certain autonomous taxi networks, not from trucks, drones, utility scale energy storage, or the MaaS opportunity in China.”

ArkInvest projects that Tesla can achieve this transition within the next five years. Musk himself has fed into this story with gusto. Earlier this month, he claimed that Tesla’s full self-driving technology would be “feature complete” and fully operational by the end of 2019.

ArkInvest is far from alone in this enthusiasm. Morgan Stanley’s (MS) Adam Jonas has been a persistent booster for Tesla’s notional future autonomous vehicle services, which he has labeled “Tesla Mobility.” As we discussed in a research note last October, $95 of Jonas’ $291 price target was attributed to Tesla Mobility. That is fully a third of the company’s total valuation in the analyst’s mind.

Unfortunately, these lofty price targets are based on ambitious dreams rather than concrete reality.

Colliding with Reality

Tesla’s decision to scrub reference to the Tesla Network is very significant. The company has been playing up its self-driving technology for years, and Musk has repeatedly guided for its imminent release. Yet, in reality, Tesla is nowhere near the lead in autonomous driving. As we discussed in a recent research note, Musk’s big promises have largely proven to be little more than fantasies. Waymo (GOOG) (NASDAQ:GOOGL), General Motors (GM), and Ford (F) are widely regarded to have a considerable lead over other autonomous vehicle programs. Tesla, meanwhile, has once again been ranked dead last in Navigant’s latest industry survey.

Worse still for Tesla is the growing number of experts calling out its approach to autonomy as fundamentally flawed due to a lack of LIDAR. As we have discussed previously, regulations will almost certainly mandate the use of LIDAR in the event of the legalization of autonomous vehicles. Tesla, which has eschewed that technology, could well find its technology made wholly obsolete before it even has a viable product.

As for the timeline, again Tesla has proven highly misleading. Top experts and executives in the space generally acknowledge that full autonomy is many years away. Waymo’s CEO, for example, thinks it will take a decade at least to get to the level of sophistication and safety for self-driving cars to hit public roads.

Musk and Tesla have failed to present any compelling case for why their approach will lead to such a radically faster rollout. It seems to be nothing more than aspirational talk, not backed up by any concrete evidence. Musk has made hay with such ploys in the past, but it will ultimately blow back on Tesla.

Investor’s Eye View

Tesla’s vaunted valuation is based on a number of highly tenuous premises. The idea that infinite demand for its vehicles will drive massive sales growth has fallen flat this quarter, in light of mounting evidence that demand has fallen off a cliff. Tesla’s solar business, another element that is supposed to make it “more than a car company,” has been shrinking for a while, with no end in sight.

Now it is the autonomous vehicle program’s turn to disappoint. Even the once-reliable Adam Jonas has turned bearish in Tesla Mobility’s near-term prospects. In his latest research report, published after Tesla’s website overhaul, Jonas slashed his price target to $260, with Tesla Mobility’s value dropping to $55. Jonas opined that the technology is taking far longer than initially expected to develop and could take many years - perhaps more than a decade - to complete.

Virtually every significant contributor to Tesla’s growth narrative is facing significant headwinds at present. Walking back on self-driving and the Tesla Network represents one more collision with reality that no amount of futuristic forecasting can overcome.

As the reality of the Tesla Network’s limitations becomes clear, investors should expect the share price to suffer.

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.