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FSD: How Do I Estimate The Value Of Full Self-Driving?

|Includes: Tesla, Inc. (TSLA)
Summary

There are two parts to estimating the value of full self-driving.

This article walks the reader through both parts independently using conservative assumptions and reasoning from first principles.

I welcome and encourage well-thought-out feedback in the comments to this article.

Let's get right to it.

There are two parts to the value of full self-driving (FSD") capability: 1) the effective value of time saved not driving and 2) income-generating ability.

Effective value of time saved not driving

The following are my assumptions. I welcome and encourage well-thought-out feedback in the comments to this article.

  • Potential Tesla customers make more than $100,000 per year. This approximates 13% of the US population, or tens of millions of people in the US alone, and more than 100 million people around the world. Coupled with the facts that (1) the Model S and the Model X have been the dominant choice in their niche markets, and that (2) Tesla will be production-constrained for the foreseeable future, it is reasonable to assume that Tesla's addressable market will be people making above $100,000 per year, or effectively ~$50/hr, for some time to come. Readers should note that this figure would be substantially higher (more than ~$150/hr) if we were to assume that top 1% of the population, which is still more demand than Tesla can possibly supply in the next three years, is the likely buyer of Tesla's products.
  • At least some of the 100 million people identified above would be willing to trade $50 for an hour of extra free time, which they can use to catch up on e-mails, watch a movie, listen to an album, chat with family or friends over FaceTime, spend time on social media stalking the Kardashians etc.
  • The average commute time to work in the US is ~30 min each way, or 5 hours per week. Readers should note that a significant portion of the population spends more than 1 hour each way every day. Most people also use their car for purposes other than commuting to work. Therefore, it's reasonable to assume that Tesla customers who opt for FSD will save at least 5 hours per week.
  • Most people hold onto their cars between six and ten years. For conservatism purposes, and due to my expectation that at some point all new cars will be fully autonomous, I will assume five years for this variable.

Given these assumptions, the calculation is simple:

$50 per hour x 5 hours per week x 50 work weeks x 5 years = $62,500

I conservatively estimate that the value of time saved not driving in a fully autonomous car is at least $62,500 more than even a partially autonomous car, all else equal. We also know that all else is not equal between Tesla's products vs. competition, since Tesla has already achieved decisively dominant market shares in the niche segments in which it currently competes without full autonomy due to its products' superior design, superior safety ratings, superior brand value and so forth.

Value of income generation

The following are my assumptions. I welcome and encourage well-thought-out feedback in the comments to this article.

  • Tesla will realize its goal of full autonomy by the end of 2017.
  • At least some states will allow autonomous cars to drive riders around without a human driver by the end of 2018, a full year after . I expect that California, with its nearly 40 million population, to be the first state to do so; and New York, with its nearly 20 million population to be a close second. Approval from California alone would create significantly more demand for FSD-capable cars than Tesla can possibly supply in the next two years.
  • At least some potential Tesla customers will choose to earn income using their cars. I know I will.
  • In the 23 hours that a car is not used by its owner, the fully autonomous car will be able to drive 10 rides per day.
  • Average fare will be $10 per ride. Current average Uber and Lyft fares are more than $10 per ride.

Given these assumptions, the calculation is simple:

$10 per ride x 10 rides per day x 365 days x 5 years = $182,500

I conservatively estimate that the income-generating value of a fully autonomous car is at least $182,500 more than even a partially autonomous car, all else equal.

Subscribers to the Tesla Forum was provided with early access to this article, two days after I called the bottom on May 4 with 1Q17 Results: Buying Opportunity. You can follow my articles on Tesla and other companies by signing up here: Seeking Alpha Author Research.

Bottom Line: The total estimated value of FSD is nearly $250,000. As absurd as this seems, it is calculated using logic and simple algebra. Readers should note that the post-tax credit price of the Model 3, in some states, will be as low as $25,000. My calculation above ignores the value of superior design, superior safety ratings, and other benefits that all-electric vehicles enjoy. Because of these reasons, it is reasonable to assume that Tesla will be production-constrained for the foreseeable future. I welcome and encourage well-thought-out feedback in the comments to this article.

Disclosure: I am/we are long TSLA.