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TSLA: Hardware Vs Software - Battle For Profitability


Tesla announced during the Q2 Earnings call that an order of magnitude to its hardware processor will achieve tremendous strides for the AI neural network-enabled Auto-Pilot software.

Integrated software & hardware play key to production efficiencies and streamlining products.

Software purchases for profit shall be viewed as apps with $1000 dollar prices tags.  Software development capex will remain low well after releases of initial core offerings.

As Tesla Model 3 deliveries continue to ramp up along side costly capex expansions, investors may grow worrisome of the future outlook on profitability and near-term ROI.

During the earnings call Elon and his AI team outlined a compelling, in the works, hardware v3 to be available in future Tesla vehicles including the Model X and Model S.  Elon tweeted earlier this evening an estimated time table of 4 to 6 months for the release of hardware v3.  Hardware v2 is currently installed across all vehicles today.  The differences between the two is seen in  processing power of 200fps on hardware v2 and 2,000fps on hardware v3, respectively - amazing upgrade by any standards in any industry.Take into consideration Auto pilot hardware v3 will replace an NVIDIA processor (vendor) with an in-house processor, resulting in increased production control, lower capex, and well beyond class-leading speed.  How does this become profitable?We have come to accept Apple's proprietary ecosystem of software & hardware in all their products.  Can you use your beloved audiophile headphones on the latest iPhones - the answer is, no.  The price to join this ecosystem is to play by $AAPL 's rules, regardless of your industry - they are the gatekeepers.Imagine your an auto manufacture with a superior AI neural-network enabled processors in full control over software powering a fleet of millions of self-driving electric vehicles.  Now imagine you charge $8,000 at time of ordering the vehicle or $11,000 after-the-fact to gain access to Auto Pilot features.Customers will likely opt-in to propel themselves into the future of driving.  Consider these upgrades similar to Apps, like in the App store.  Take the concept a step further and add in-car food delivery, entertainment on-demand, and a wealth of other features Tesla has yet to imagine.The moment investors see the momentum in software sales paired with world-leading autonomous driving demand.  I would personally prepare for an inevitable paradigm shift in how Automakers treat the hardware they produce coupled with the software they curate and control.

As Elon stated on the Q2 earnings call - "every problem has a software solution" and perhaps becoming profitable is also in fact a software solution too?

Disclosure: I am/we are long TSLA.

Additional disclosure: I have no investor affiliations - the opinions stated here are of my own and mine alone.