The Elon Musk hype-machine was back at it again recently with a new bold forecast for the future of Tesla. In an investor call stemming from Tesla’s plans to raise an additional $2B in capital, Musk claimed on Thursday that autonomous driving technology would propel Tesla to a $500B market cap – this according to 2 attendees of the call cited by CNBC.
Tesla does seem to be far and ahead the leader in the autonomous driving industry. With the hundreds of thousands of semi-autonomous Teslas on the road today providing an endless stream of data back to software developers, Tesla has a significant leg up on the competition. A leg up today certainly doesn’t mean a leg up tomorrow though. The autonomous driving space is crowded with every major automobile manufacturer, behemoth tech companies like Apple and Google, and a slew of start-ups. One could argue that despite the lead Tesla enjoys today, many of these companies are better positioned based purely on their financials. How much longer can Tesla keep burning through cash? Apple and Google on the other hand could spend many multiples of what Tesla spends a year on R&D if they so desired and it wouldn’t even make a dent on their balance sheets.
At the time of writing this, the combined market cap of the top 10 valued automakers in the world (Toyota, VW, Daimler, GM, BMW, Honda, Tesla, Ford, Nissan and Fiat) was shy of $650B. As global car sales stagnate, Tesla would have to swallow the sales of these competitors and become by far the world’s largest producer if it plans to reach a $500B market cap. If you think the capacity issues they’re facing right now are a problem, just think if they produced 70% of the world’s cars.
That scenario would never materialize and Musk certainly realizes this, so how could he make such a claim? Simple, “Robotaxis”.
Musk has well-detailed plans on deploying a fleet of robotaxis by mid-2020. The ride-sharing fleet would be comprised of privately owned vehicles and cars owned by Tesla where low privately-owned volume demands it. The timeline is aggressive, and like the rest of Musk’s timelines will probably not come to pass (even if the technology is figured out, the regulatory approval will drag it out), but we’ll go with it for now.
The barriers to entry in this space are low for well-funded competitors and getting lower every day. There is no moat, so to speak, preventing others from excelling in this industry. Maybe Tesla will be the first to achieve full-autonomy at scale and deploy a fleet of cash generating robotaxis in 2020. You can bet your Model-S that the competition won’t be far behind. At that point the margins disappear as they all duke it out in an Uber/Lyft style price war in which the company with the most cash wins, assuming the service they are providing is identical.
Let’s keep the fantasy going and pretend Tesla has captured 50% of the global ride-share market and 1% of the OEM market by 2025. Both of these are completely ridiculous figures, but for the sake of argument we’ll let it ride and see where it gets us. To put those numbers in perspective, Tesla currently owns less than 0.2% of the global OEM market and has no presence in the global rideshare market.
Tesla plans to collect 20-30% on each robotaxi ride. Statista expects the global rideshare market to reach $133B by 2023. Extrapolating this growth rate to 2025, the industry would be worth $150B. At 50% market share, collecting 30% on rides and priced at a generous 10x P/S, Tesla’s rideshare business would be worth $225B.
Again extrapolating Statista’s car sales out to 2025, there will be 119 million units sold in 2025. At 1% market share, Tesla could expect to sell 1.19 million cars. Musk also mentioned on Thursday that with autonomous technology in these cars, they will be worth $150,000 - $250,000 per unit. Putting aside the fact that there is clearly no market to sell 1.19 million cars at $250,000 apiece (again using the high end of the range to paint a better picture), this only translates to a $150B business at 0.5x P/S. If we use current selling prices that figure drops to around $30B.
Based on these assumptions we will assign $225B to the ride-share side of the business and $150B to the OEM business. Add in another $10B for Tesla’s home battery and solar panel business and this highly optimistic scenario, which brings together growth and market share estimates many times what I realistically expect, yields a market cap of $385B.
The reason I’m using 2025 as reference is two-fold. One, with such a rapid pace of technological change, any estimations past 2025 is highly questionable. More importantly to this thesis however, is that by 2025, other companies will have successfully entered the autonomous rideshare space, Tesla’s margins will have contracted and growth prospects will be much dimmer, demanding much lower multiples on the stock price.
Tesla may very well reach $500B at some point far in the future, but it won’t in any short to medium term investment horizon and to do so will require a revolutionary pivot beyond autonomous driving.
Don’t get me wrong, Tesla definitely has high growth prospects, and if you like these extremely generous assumptions, it would be a great investment over the next few years. If it can figure out its production issues and capitalize on a few years of being the only autonomous rideshare service, then it will see tremendous growth. The timeframe of that growth, however, is limited by competition in the space which will cap the value of the company well below the $500B that Musk promised on Thursday.
There is no question that Musk is a visionary - he drastically changes every industry he gets his hands on. Sometimes it feels like he has bitten off a bit more than he can chew and compensates with a bold new prediction to get investors excited. It’s a troubling pattern that should bring about trepidation in investors rather than excitement. And as more and more of these predictions come up short, Musk is increasingly exposing himself to lawsuits and investigations which shareholders will ultimately end up financing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.