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Morningstar | Tesla Unsurprisingly Goes Bold in Its First Autonomous Vehicle Analyst Day

No-moat Tesla held its first autonomous vehicle analyst day on April 22. The presentation from three senior autonomous vehicle, or AV, team members and CEO Elon Musk was technical and focused on the capabilities of Tesla's internally developed chip and full self-driving system. We have long considered Tesla one of the leading AV players, along with firms such as GM, and this presentation confirmed that. This technology is already being put into all Tesla vehicles and, pending regulatory approval, Musk said the vehicles can do full autonomy (Level 5) by 2020. This is impressive because no other firm claims to be capable of Level 5. For now Tesla says it just needs to improve its software. The plan for late 2020 is Tesla owners will, via an app, place their vehicle into a Tesla ride-hailing fleet when they don't need it, with Tesla taking 25%-30% of the revenue. These vehicles will mostly be Model 3s because these are Tesla's high-volume vehicles and when a Model 3's lease comes to an end, the owner cannot buy the vehicle outright, as is customary, because Tesla will put these vehicles in the fleet. Tesla will also have dedicated AV fleet vehicles for locations with high demand.

We are not raising our fair value estimate of $240.00 because we want to see Tesla execute on this plan, but we will watch this story unfold in future as the potential is significant. Tesla talked about a Model 3 generating ride-hailing revenue of $30,000 annually once it returns to Tesla, which means a charge to the ride-hailing customer of $0.43/mile if we assume utilization of 70,000 miles a year. This is cheaper to use than the $2.50 mile today that ride-hailing firms currently charge. However, over time ride-hailing services will be commoditized and pricing will fall. We think regulators will be slow to let Tesla have Level 5 autonomy in an entire state but this technology suggests the U.S. government needs to set national standards on AVs soon, which we do not forecast to happen.

For now, we expect regulators to essentially let Tesla use its Level 5 technology in a more Level 4 way, meaning in a geofenced area. We would expect only a few jurisdictions at first to permit the technology and we expect it will primarily be used in dense cities such as San Francisco. When asked about who would have liability in an accident, Tesla or the Tesla's owner who is letting their vehicle into the network, Musk said probably Tesla but doesn't appear to have given that much thought based on his response to the question.

There are many unknowns about how this plays out. Tesla is assuming people who could not afford a Tesla will go ahead and buy one, and buy it with full autonomy enabled because they can make money in the Tesla network, but there is uncertainty whether those consumers will pay the high upfront costs for a supposed payoff over time. A Model 3 full autonomy option currently costs $5,000 upfront or $7,000 if activated after delivery, for example.

Still, the economics make sense to us if the owner is willing to have times when their vehicle is not available to them and they are willing to incur perhaps an extra 50,000-60,000 miles or more of usage a year beyond their own use of the vehicle. Although Tesla's new battery system, due in 2020, will be designed for a million miles of use, that is still extra depreciation and risk of damage a consumer may not be willing to incur if they are not planning on owning their vehicle for a long time. A fleet operator would be more likely to incur these risks in our opinion, but these vehicles are used only in the Tesla ride-hailing fleet so a firm such as Uber cannot buy these vehicles. We remain skeptical because we are unsure Americans will really give up using their personal vehicle in large numbers, even if they get paid. For more of our AV analysis, see our October 2018 report, "Autonomous Vehicles Mean Massive Disruption and Opportunity".

Tesla will launch a new generation chip in about two years, according to Musk, that will be three times better than the current one. Tesla's approach is unique, with all vehicles sold to consumers having the hardware for Level 5 already installed and every vehicle is helping Tesla's neural network learn. Other automakers just have dedicated AV test vehicles that are not used by consumers, so having more examples for the Tesla network to learn from, could help Tesla have Level 5 first. We believe, however, there are too many other firms making AVs and doing ride-hailing for Tesla to have long-term dominance. AV capability will therefore eventually be a commodity, and even with leadership Tesla needs to make lots of vehicles for their technology to really matter. We also do not see it being able to do the latter any time soon in quantity and in competition with large automakers.