Insights Into Tesla’s Trillion-Dollar Robotaxi Question From Elon Musk

Summary:

• Tesla, Inc. investors and analysts are focused on its potential robotaxi business, with one projection valuing its robotaxi business at more than $5 trillion by 2029.
• CEO Elon Musk believes autonomous robotaxis are the future for Tesla, with plans for a gigantic fleet and a new vehicle unveiling on October 10th.
• I believe Tesla does have the potential for a viable robotaxi business, although it will take much longer and won’t be as gigantic as Elon Musk expects.
• Interpreting quotes from Elon Musk, I try to shed some light on the issues and potential for investors.
• The Tesla robotaxi announcement also has implications for investors in Uber, Waymo, and Cruise.

Tesla, Inc. (NASDAQ:TSLA) investors and analysts are highly focused on its anticipated robotaxi business. There are some extreme projections about the value of a robotaxi business to Tesla. For example, ARK Invest has a $2,600 stock price for Tesla. It projects a $2,600 stock price for Tesla by 2029, with a $2,250 value from the robotaxi service and $350 without it. That implies that Tesla’s robotaxi business could be valued at more than $5 trillion! So, understanding Tesla’s robotaxi business as much as possible and setting appropriate expectations about it seems to be among the most important investor questions in the stock market today.

In this article, I try to shed some thoughtful light on this trillion-dollar question for investors by interpreting CEO Elon Musk’s own words (those from others are obviously meaningless). Although he hasn’t given specific guidance on Tesla’s future robotaxi business, Musk tends to openly share more of his unvarnished thinking than most other CEOs, and you can learn a lot from them. All of Elon Musk’s quotes here are from either his Q1/24 Earnings Call Transcript or his Q2/24 Earning Call Transcript.

Is The Robotaxi Tesla’s Future?

Autonomous robotaxis are the future for Tesla. In the Q1/24 earnings call, Musk claimed that investors should only focus on autonomy or not invest in Tesla:

So we’re doing well. But I think Cathy Wood said it best, like really, we should be thought of as an AI or robotics company. If you value Tesla as just like an auto company, you just have to – fundamentally, it’s just the wrong framework and it will come to be.

If you ask the wrong question, then the right answer is impossible. So I mean, if somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be an investor in the company.

He also made highly optimistic projections for the robotaxi business in his Q1 earnings call (I’ll examine how realistic these estimates are later in this article).

It will be 7 million cars in a year or so and then 10 million and then eventually, we’re talking about tens of millions of cars. Not eventually, it’s like, yes, for the end of the decade, its several tens of millions of cars I think.

What Insights Can We Get Into The Tesla Robotaxi?

So, the viability, timing, and ultimate success of Tesla’s robotaxi business is essential for Tesla investors. Let’s start by examining some critical questions. I’ll summarize my conclusions at the end.

Is Tesla FSD ready for a robotaxi?

Elon Musk (Q2/24) believes that its Full Self-Drive (FSD) is ready or very close to being ready for autonomously driving a robotaxi:

Regarding Full Self-Driving and Robotaxi, we’ve made a lot of progress with Full Self-Driving in Q2, and with version 12.5 beginning rollout, we think customers will experience a step change improvement in how well-supervised full self-driving works. Version 12.5 has 5x the parameters of 12.4 and will finally merge the highway and city stacks. So, the highway stack is still at this point is pretty old. So often, the issues people encounter are on the highway, but with 12.5, we are finally merging the two stacks.

I still find that most people actually don’t know how good the system is, and I would encourage anyone to understand the system better, to simply try it out and let the car drive you around. One of the things we’re going to be doing just to make sure people actually understand the capabilities of the car is when delivering a new car and when picking up a car for service to just show people how to use it and just drive them around the block.

And as we increase the miles between interventions, it will transition from supervised full self-driving to unsupervised full self-driving, and we can unlock massive potential.

I almost agree with him. Tesla has made great improvements to its FSD over the last couple of years. I’ve personally driven some of its latest software versions over the last two months, and there have been many improvements since my criticisms two years ago.

• The maps are now high-definition with the detail necessary for autonomous driving.
• The FSD vehicle can turn corners safely and stop at traffic lights and signs.
• It can anticipate the number and curvature of lanes it is turning into.
• And much more.

Musk’s remark about the importance of merging the two software stacks (highway and metropolitan) is correct. It’s a significant step. Tesla’s maps have also improved dramatically in resolution and accuracy. In “Navigate on Autopilot” mode, the vehicle follows the map very well.

While much improved, Tesla FSD is not 100% perfect. For example, it still goes too fast on some curves in the road and doesn’t slow down early enough to exit highways. It changes lanes when it shouldn’t. It still can’t manage right-turn-on-red situations very well, and most likely won’t be able to. There are no standards for these signs; some are unique, with restrictions at certain hours.

I enjoy letting the Tesla drive itself while others in the car watch with amazement — and well with fear, too — while the car stops at traffic lights and stop signs and then turns on its own. That combination of amazement and fear is what will shape the eventual adoption rate of the robotaxi market.

A Tesla in FSD can’t drive in all locations and situations. It cannot be classified as SAE Level 5, where a vehicle can drive anywhere under any conditions. However, if Tesla added geofencing to its maps, it could be capable of SAE Level 4, which is enough for autonomous ride hailing services (robotaxis).

Elon Musk hasn’t discussed geofencing at all and seems to ignore it, but it could be how Tesla can successfully launch its robotaxi service. Geofencing limits the routes a robotaxi can travel to those that have been proven by repeated testing and updated regularly. It can then avoid roads where it won’t work safely. It can avoid construction sites and even be updated quickly to avoid emergencies like fires and accidents. If Tesla doesn’t use geofencing to limit autonomous driving initially to safe and proven routes, then it increases the risk of serious accidents. It only takes one serious accident to derail its service.

Will Tesla unveil a new vehicle for its robotaxi?

According to Musk’s comments (Q2/24), the new robotaxi to be unveiled on October 10th will be a different vehicle and will be the key to the event:

We postponed the sort of Robotaxi the sort of product unveil by a couple of months where it were — it shifted to 10/10 to the 10th October -end because I wanted to make some important changes that I think would improve the vehicle — sort of Robotaxi, the thing that we are — the main thing that we are going to show and we are also going to show off a couple of other things. So moving it back a few months allowed us to improve the Robotaxi as well as add in a couple other things for the product unveil.

And I should say that the Cybertaxi or Robotaxi will be produced here at our headquarters at Giga Texas.”

Will Tesla call its new vehicle the Cybertaxi? There have been no substantial leaks of what the vehicle might look like, but Elon Musk offered this photo for his biography last year.

It will most likely be a beautiful, passenger-friendly vehicle that includes Tesla’s latest hardware, computer system, and most advanced FSD software. It may require Tesla hardware Versions 5. Furthermore, it will be built in Tesla’s Austin factory, and I expect production in 2025. Expect that Tesla fans will go wild over it, and it could quickly bump its stock price.

Will the new robotaxi vehicle have driver controls?

Although Musk has yet to confirm it, the new robotaxi will most likely be a custom-designed passenger-focused vehicle. The photo above and a recently leaked interior photo suggest this.

The National Traffic Safety Administration (NHTSA) requires all new vehicles sold in the US to comply with Federal Motor Vehicle Safety Standards. The standards include all driver controls, such as the steering wheel, brakes, mirrors, etc. Autonomous ride hailing vehicles (robotaxis) don’t need driver controls, so they require an exception to these standards. As GM found with its Origin, this is very difficult to attain.

At the Q2/24 earnings call, George Gianarikas asked that question regarding regulatory approvals for the new vehicle.

Maybe just to expand on the regulatory question for a second. And I could be comparing apples and oranges, but GM canceled their pedal-less, wheel-less vehicle. And according to the company this morning, their decision was driven by uncertainty about the regulatory environment. And from what we understand, and again, maybe I’m wrong here, but the Robotaxi that has been shown, at least in images of the public, is also pedal-less and wheel-less. Is there a different regulatory concern just if you deploy a vehicle like that that doesn’t have pedals — pedals or a wheel, and that may not be different from just regular FSD on a traditional Tesla vehicle? Thank you.

Musk didn’t refute the question by saying it would have driver controls and not require special federal regulatory approval; instead, he criticized GM in his response:

Well, obviously the real reason that they cancel it is because GM can’t make it work, not because the regulators, they’re blaming regulators. That’s misleading of them to do so, because Waymo is doing just fine in those markets. So it’s just that their technology is not far.

Note: Waymo is using standard vehicles with driver controls even though they aren’t used, so it doesn’t require exceptions. It seems like Musk may not understand this issue sufficiently.

Tesla should expect a long and tedious process for getting federal approval to deploy a robotaxi without driver controls, contrary to Musk’s comment that the reason for the delay was General Motors’ (GM) technology. However, Musk may hold a “Trump Card” in this. If Donald Trump is elected president with millions of dollars of support from Musk, Tesla could get fast-track approval for a driverless robotaxi vehicle.

Will the Tesla robotaxi service be fleet-based?

While there will definitely be a Tesla robotaxi fleet, there remain two big questions about the makeup of this fleet: (1) will it be based in municipalities? And (2) what Tesla owners will be able to offer their vehicles to the fleet.

From the Q1/24 earnings call, Musk made it clear there will be a gigantic fleet:

So you can think of like how Tesla, think of it’s like some combination of Airbnb and Uber, meaning that there will be some number of cars that Tesla owns itself and operates in the fleet. There will be some number of cars and then there’ll be a bunch of cars where they’re owned by the end user.

But really, the way to think of Tesla is almost entirely in terms of solving autonomy and being able to turn on that autonomy for a gigantic fleet. And I think it might be the biggest asset value appreciation history when that day happens when you can do unsupervised full self-driving.

Yes. It will be 7 million cars in a year or so and then 10 million and then eventually, we’re talking about tens of millions of cars. Not eventually, it’s like, yes, for the end of the decade, its several tens of millions of cars I think.

He expanded on this in the Q2/24 earnings call, repeating his thoughts that it would be a mixed fleet of Tesla and customer-owned cars.

This would just be the Tesla network. You just literally open the Tesla app and summon a car and resend a car to pick you up and take you somewhere.

And now this is for a customer on fleet. So you can think of that as being a bit like Airbnb, like you can choose to allow your car to be used by the fleet, or cancel that and bring it back. It can be used by the fleet all the time. It can be used by the fleet some of the time, and then Tesla would take — would share on the revenue with the customer. But you can think of the giant fleet of Tesla vehicles as like a giant sort of Airbnb equivalent fleet, Airbnb on wheels.

The — I mean, then in addition we would make some number of cars for Tesla that would just be owned by Tesla and be added to the fleet. I guess that would be a bit more like Uber. But this would all be a Tesla network. And there’s an important clause we’ve put in, in every Tesla purchase, which is that the Tesla vehicles can only be used in the Tesla fleet. They cannot be used by a third-party for autonomy.

Musk’s current vision is for a hybrid Tesla fleet with specifically designed robotaxis and customer-owned vehicles. Tesla vehicles would probably include current models as well as the new robotaxi vehicle. Most likely, the new robotaxi vehicles will be more popular.

There are major issues with the inclusion of customer-owned vehicles in the fleet. They would certainly require some form of certification by Tesla that they had the necessary hardware and software. Many current Tesla vehicles probably don’t have that. They would need to have the robotaxi dispatch and monitoring software installed.

They would most likely need to be managed by a fleet center for charging, cleaning, and maintenance. Customers wouldn’t want to get a dirty car with laundry in the back seat and a low battery dispatched from someone’s home. Customers would most likely need to assign their vehicles to the Tesla fleet for a period of time, such as several months, and not just for a few hours.

Tesla will require significant capital investment if it provides a major portion of this fleet. Musk talks about millions of robotaxi vehicles. As a reference point, one million robotaxis would require an investment of approximately $45 billion. And 7 million in a year would be unaffordable.

Perhaps, Tesla will get customers to buy its new robotaxi vehicle. If it included driver controls, then that might be possible. Maybe it could include retractable driver controls. That is something to look for in the announcement.

Autonomous ride hailing services require fleets based in each metropolitan area they serve. Each fleet provides rides to passengers in that metropolitan area. Fleets also provide other critical services, including:

• Charging the vehicle,
• Inspecting and cleaning the vehicle,
• Updating the boundaries on geofenced maps,
• Working with local authorities such as first responders,
• Intervening with a disabled or confused vehicle, and
• Marketing and promoting the service locally.

Fleets are rolled out by metropolitan areas deliberately over time. For an in-depth explanation, see: Autonomous Vehicles: Opportunities, Strategies, and Disruptions.

Elon Musk doesn’t seem to buy into this yet. In response to this question from Ferragu Pierre (Q2/24):

Okay. And do you think that scale is like progressively so you can start in a city with just a handful of cars and you grow the number of cars over time? Or do you think there is like a critical mass you need to get to, to be able to offer like a service that is of competitive quality compared to what like the — like Uber would be typically delivering already?

Elon Musk’s response

I guess I’m not — maybe I’m not conveying this correctly. The entire Tesla fleet basically becomes active. This is obviously maybe there’s some number of people who don’t want their car to own money, but I think most people will. It’s instant scale.

Will Tesla have its own robotaxi network or work with someone like Uber?

Tesla will clearly have its own network with ride request and dispatch capabilities.

Elon Musk (Q2/24)

Yes. This would just be the Tesla network. You just literally open the Tesla app and summon a car and resend a car to pick you up and take you somewhere. (I think he actually said “we send” no “resend.”

This obviously dashed any of Uber’s (UBER) hopes to get a piece of Tesla’s robotaxi business.

How big are Tesla’s robotaxi aspirations?

According to Elon Musk, its aspirations are huge:

we’ll have a fleet that’s I don’t know, on order of 7 million dedicated global autonomy soon. In the years come it’ll be over 10 million, then over 20 million. This is immense scale. And the car is able to operate 24/7, unlike the human driver.”

So, just how big is the service provided by 7 million autonomous robotaxis operating 24/7? If each does 15 trips per day that equals 1,350 trips per quarter per vehicle. For 7 million vehicles, that would be 9.45 billion trips per quarter. To put this into perspective, Uber only had 2.6 billion trips (both passenger and delivery) in the last quarter of 2023 for gross bookings of $37.6 billion.

That would give Tesla quarterly revenue of $135 billion (remember bookings for ride-sharing equals revenue for autonomous ride hailing services because it eliminates the 70% share to drivers) or, if you assume a lower price per trip, maybe $100 billion per quarter.

This also assumes little or no competition. However, I think Tesla will have some very significant competitors.

Overall, I think Musk’s estimates are overblown and not based on reality.

Potential Impact on Waymo and Cruise

A Tesla robotaxi business will have significant competition. Waymo (GOOG) and Cruise (GM), particularly Waymo, are the leaders in this market and should continue to hold leadership positions.

Cruise has rapidly increased its paid autonomous ride hailing services in California over the last nine months.

	August 2023	May 2024
Trips per Month	12.6K	143.6K
Miles per Month	101.3K	903.5K
Passengers per Month	19.7K	204.4K

Click to enlarge

Tesla will have a lot of catching up to do.

Tesla’s planned entry will help validate the market and accelerate adoption. That should accelerate revenue growth for both Waymo and Cruise, as more people will accept autonomous ride hailing services.

I doubt Tesla will gain significant market share over these two in the next 2–3 years, if ever.

Conclusions

Musk’s earnings calls provide important inferences to investors about its robotaxi business. It’s clear that Tesla is “all in” on becoming an autonomous vehicle robotaxi business. It’s unprecedented that a CEO would discourage investors from investing in his company unless it changes. Tesla investors should take his advice, decide what they are investing in, and understand the potential and risks to its future as an autonomous robotaxi company.

I expect Tesla’s unveiling of a new robotaxi vehicle will capture the imagination and create great interest. It could be one of the major events of the year. It will also accelerate interest in autonomous ride hailing. The new robotaxi vehicle will most likely go into production sometime in mid to late 2025.

Tesla’s FSD can autonomously drive a robotaxi, with a significant caveat. It must be restricted to geofenced boundaries. Musk doesn’t recognize this yet, but I expect that he will come to that conclusion. While this slows the launch of the autonomous ride hailing service, it doesn’t diminish its potential long-term success. Musk has also ignored the need for local, state, and federal approvals, and this will be a problem that will slow its launch. My best estimate is that Tesla will begin testing its robotaxi business in 2025 and begin to launch it in 2026. So, investors will need to be patient.

His thoughts about an instant national scale of millions of autonomous vehicles providing passenger-paid rides are fundamentally infeasible, irresponsible, and extremely risky. It would violate city, state, and federal regulations, create havoc, and immediately cause numerous accidents. To make a robotaxi business feasible, he needs to scale back expectations to get the required approvals and launch it initially in selected metropolitan areas with geofenced boundaries. If Tesla does that, it will have a viable robotaxi business, but not of the immediacy and scale he predicts.

I love Tesla’s technology and vehicles, and I drive regularly in FSD mode. I also agree that the market for autonomous ride hailing (robotaxis) will be massive. However, I don’t like Tesla as an investment. At its current valuation with a forward P/E of 92X on relatively flat revenue, the potential for a robotaxi business is already included. There is little upside in the valuation and plenty of downside risk.

As I previously discussed in my previous SA article, the Tesla robotaxi announcement will present some risks for Uber. It also makes you wonder if there is any reality to Tesla’s robotaxi business possibly being worth more than $5 trillion. If so, then what could be the potential value of Waymo and Cruise?

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of GM AND GOOG either through stock ownership, options, or other derivatives. 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.

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