Tesla: Ignore The Delivery Miss Noise, Focus On ‘We, Robot’

Summary:

• After reporting a wafer-thin deliveries miss for Q3, Tesla stock took a 5%+ tumble in quick order.
• However, Tesla’s valuation hinges on AI/FSD projects like Robotaxi and Optimus, making it a binary bet on autonomy.
• The upcoming “We, Robot” event is crucial; success could skyrocket the stock, while disappointment could trigger a significant drop.
• Given the current valuation and uncertain robotaxi event outcomes, I now rate Tesla a “Hold” in the mid-$200s, with a 5-year expected CAGR of ~12%.

Introduction

In Q3 2024, Tesla, Inc. (NASDAQ:TSLA) (NEOE:TSLA:CA) returned to positive y/y deliveries growth — delivering ~462.9K vehicles [+6.4% y/y, +4.3% q/q] — but failed to hit the consensus estimate of ~463.3K vehicles.

While a 0.1% miss on deliveries is a nothingburger, Mr. Market is reacting quite negatively on the back of this report, with Tesla stock trading lower by roughly 6% in early trading on Wednesday:

Yes, Tesla’s production growth outstripped delivery growth in Q3; however, the quantum of inventory build-up — 7K vehicles — isn’t problematic.

So, what’s going on?

In my view, Tesla’s stock has run up from the $180s to $250s anticipating its upcoming robotaxi event — “We, Robot” — which is widely viewed as Tesla’s “ChatGPT” moment among its shareholder base.

Now, as I shared in my previous report, Tesla derives most of its value from its AI/FSD (full self-driving) projects, i.e., Robotaxi and Optimus:

While Tesla investors could be looking towards cheaper models and the next-gen $25K vehicle (i.e., volume growth) to justify its premium valuation, I firmly believe that Mr. Market is pricing Tesla as an AI & robotics company (i.e., giving a lot of credit for futuristic projects like FSD, Dojo, and Optimus humanoid robot) and not an EV maker.

Here’s why:

• If Tesla were priced like an auto company at say ~10-20x P/E, assuming NTM EPS of $3, TSLA stock would be trading at $30-60 per share or $105-210B in market cap.

Looking at it from a different angle, without a high-margin AI/software business [FSD + Optimus], Tesla is probably worth less than $200B. Since Tesla’s current market cap is $700B, the market is essentially ascribing a value of $500B to autonomy!

As I see it, Tesla is a binary bet on autonomy, and Elon Musk seems to agree:

The value of Tesla overwhelmingly is autonomy. These other things are in the noise relative to autonomy. So I recommend anyone who doesn’t believe that Tesla will solve vehicle autonomy should not hold Tesla stock. They should sell their Tesla stock. If you believe Tesla will solve autonomy, you should buy Tesla stock.

Although the numbers sound crazy, I think Tesla producing at volume with unsupervised FSD essentially enabling the fleet to operate like a giant autonomous fleet. And it takes the valuation, I think, to some pretty crazy number. ARK Invest thinks, on the order of $5 trillion, I think they are probably not wrong. And long-term Optimus, I think, it achieves a valuation several times that number.

Source: Tesla: A $500B Gamble On Autonomy.

While the robotaxi hype is exciting, a higher stock price equates to lower forward returns. And the faint-hearted traders/investors are apparently jumping ship ahead of the big event!

In this report, we shall reevaluate Tesla’s long-term risk/reward to make an informed investment decision on TSLA stock. Furthermore, we shall consider multiple scenarios for the potentially game-changing robotaxi event.

Tesla Is A Hold In The Mid-$200s

Based on our long-term growth [25% CAGR growth for the next five years] and steady-state FCF margin [20%] assumptions for Tesla, the rapid bounce from the high-$100s to the mid-$200s per share has rendered TSLA stock a “Hold.” This is due to a significant deterioration in its long-term risk/reward — with 5-year expected CAGR going from ~15% to ~12%.

Here’s my updated valuation for Tesla:

At our previous assessment ($220 per share), Tesla’s stock was overvalued by ~18%. With TSLA stock moving to $245 per share, this overvaluation has expanded to ~27% amid no change in our fair value estimate.

Assuming a base case exit multiple of ~25x P/FCF, I now see Tesla stock going from ~$245 to ~$436 per share over the next five years at a ~12.2% CAGR. Since Tesla’s 5-year expected CAGR return has dropped from ~15% to ~12% [well under our investment hurdle rate of 15%], Tesla stock is now a “Hold” per our valuation methodology.

Is The Robotaxi Event Tesla’s “ChatGPT” Moment?

Back in May 2023, Tesla’s dynamic CEO, Elon Musk, pitched the idea of Tesla FSD achieving full autonomy as the EV giant’s very own ChatGPT/Nvidia moment in an interview with CNBC:

I think Tesla will have sort of a ChatGPT moment, maybe if not this year, no later than next year. Suddenly 3 million cars will drive itself with no one, then 5 million, then 10 million cars.

As per Musk’s own admission, he is often too optimistic, but here we are toward the end of 2024, staring at the prospect of “We, Robot” — an event Musk has recently termed as “one for the history books” on X (formerly Twitter):

Based on the title of this “Cybercab” robotaxi unveiling event, we are finally set to get details on Tesla’s next-gen robotaxi vehicle and potentially gain insights into Tesla’s autonomous vehicle network/fleet plans. Furthermore, I wouldn’t be surprised if Optimus made an appearance at the October 10 event!

With Alphabet’s (GOOGL, GOOG) Waymo and Baidu’s (BIDU) Apollo Go expanding their robotaxi businesses in the US and China, the pressure on Tesla to deliver on its robotaxi efforts is immense. After all, investors are ascribing >$500B value to Tesla’s AI/FSD projects!

Now, as we have discussed in the past, Tesla FSD moving from Supervised to Unsupervised can be the equivalent of Apple’s iPhone or Nvidia’s GenAI moment! Here’s how:

When I laid out my bullish investment thesis for TSLA stock at ~$180 per share earlier this year, I wrote the following:

In 2023, Tesla produced 1.8M vehicles and exited the year with an annualized production run rate of 2M vehicles! And, unlike most of its EV competitors (legacy auto and pure EV startups), Tesla is making billions of dollars in free cash flow making electric vehicles.

Like Tesla’s management, I don’t know how much of its serviceable-addressable-market Tesla has already captured in its automotive business. However, I the growth runway for Tesla is very, very long. The world’s transition to renewable energy is inevitable, and so is electrification of the auto market. As of 2023, EVs make up 9% of total auto sales globally, and this number will continue to rise for several years to come.

Hence, Tesla may not grow rapidly over the next couple of years, but this incredible growth story has many more chapters to come.

Furthermore, Tesla’s Energy Storage business has incredible momentum and an even longer growth runway ahead of itself. As I shared earlier in this note, Tesla’s services (& other) revenue is becoming a meaningful piece of the business, and this segment should continue to record strong growth as Tesla’s fleet size increases and in general growth of the EV market [remember all major auto manufacturers are adopting Tesla’s charging standard, with Tesla opening up its supercharging network to other auto OEMs].

In addition to these tangible businesses, Tesla is also developing ambitious futuristic projects like FSD (full self-driving), Optimus (humanoid robot), Dojo (AI chips), etc. While the outcome of these ambitious projects is uncertain and success is far from guaranteed, Tesla could potentially generate hundreds of billions of dollars per year if all or some of these projects were to work out.

Let me share some napkin math on the potential of FSD as a recurring revenue business for Tesla:

• As of Q4 2023, Tesla has ~400K FSD users in North America (with a total fleet of 5.7M vehicles, i.e., an attach rate of ~7%.
• While I do not have data on the split between upfront ($12K) and FSD subscriptions (Basic autopilot: $199 per month, Enhanced autopilot: $99 per month); let’s assume this ratio is 50:50 for the purpose of this exercise.
• Over the next five years, I see Tesla’s vehicle fleet growing to ~20-22M vehicles (considering the next-gen vehicle’s launch in 2026). If FSD reaches full ‘L5’ autonomy by then, I think attach rate could easily rise from 7% today to ~25% in the long run [and this could prove to be conservative].
• Furthermore, Musk has repeatedly claimed that FSD reaching full autonomy will boost the price of each Tesla to ~$100-200K, which basically means the value of FSD would likely ~10-15x from current price of $12K. Let’s assume it only goes up by ~5x. In this scenario, Tesla could potentially extract ~$1K per month from each FSD subscription (depending on use for ride hailing in idle time).
• Considering the 50:50 split between upfront and FSD subscriptions, a 25% attach rate (5M FSD users -> 2.5M FSD subscriptions) would result in FSD generating ~$30B in annual recurring revenue just via subscriptions! I am not even considering the upfront FSD sales numbers, and I think my assumptions are conservative. Imagine Tesla’s fleet growing to 100-200M vehicles over the long run and attach rates rising to 50-90%!
• More importantly, FSD is likely to command software-like margins. Hence, FSD could very well become Tesla’s primary profit center if full autonomy can be achieved.

Again, this is just some napkin math, but it shows how FSD could be an absolute game changer for Tesla.

Source: Tesla: Learn From The Past, Think Of The Future.

Now, I understand that FSD could need a few more years to reach full autonomy, and it may fail to do so due to technology and/or regulatory hurdles. However, Tesla FSD moving from Supervised to Unsupervised will be the equivalent of Apple’s iPhone or Nvidia’s GenAI moment!

Source: Tesla: A $500B Gamble On Autonomy.

In addition to its technologically superior approach to autonomy [no LIDARs, no geofencing], Tesla’s potential ability to instantly onboard millions of existing vehicles onto its robotaxi network is what renders FSD going from “Supervised” to “Unsupervised” an “iPhone” or “ChatGPT”-like moment.

Since Tesla’s next-gen robotaxi vehicle is purpose-designed for full autonomy, this unveiling event is viewed as a historic milestone. As a Tesla shareholder, I will be exhilarated if and when Tesla announces the attainment of level-5 autonomy; however, I don’t think such an announcement will come at the October 10 event. If it does, Tesla stock could skyrocket. On the flip side, if it doesn’t, Mr. Market could easily be disappointed.

Only time will reveal the truth.

Concluding Thoughts

Given the pre-event run-up in Tesla stock, the post-event price action could mirror “buy the rumor, sell the news,” especially if the robotaxi unveiling event is light on details and/or simply fails to inspire confidence in Tesla’s Cybercab plans. With the bulk of Tesla’s market cap being attributable to its ambitions AI/FSD projects, it is a binary bet on autonomy. The Q3 delivery miss is nothing but noise.

From a technical standpoint, Tesla looks finely balanced. A sustained breakout above $260 would be pretty bullish and open up a move into the $300s going into year-end. This is my prediction for a successful “We, Robot.”

On the flip side, if “We, Robot” disappoints, Tesla could re-test support in the $180-210 range in the near term, which I have suggested as a decent buying area for long-term investors:

From a technical standpoint, Tesla’s bullish momentum is still intact despite its post-ER pullback, as TSLA stock is still trading above a confluence of key moving averages, i.e., 10-week, 20-week, 40-week, and 100-week. In my view, the $185-210 range should serve as a strong support for the stock, with the rising trend line connecting bottoms from 2020, 2022, and 2023 (marked in yellow dotted line) providing secondary support at ~$165. This seems like a decent buying area for long-term investors.

Now, if TSLA stock starts breaking down below $160-165 again, then we could see another leg down into the low-$100s. Such a decline would likely materialize in the event of a hard landing in the economy. Tesla is currently investing billions of dollars into its ambitious AI projects. However, if its core businesses were to become unprofitable during a recession, the company could have to pull back on its autonomy investments due to lack of capital. A failure or perception of failure on autonomy can relegate TSLA stock to an auto industry P/E multiple, i.e., $30-60 per share.

Heading into Tesla, Inc.’s robotaxi unveiling event, TSLA’s long-term risk/reward [5-year expected CAGR: ~12%] isn’t attractive enough to warrant a “Buy” rating. Furthermore, the outcome of this event is highly uncertain, and the stock could really go either way. Henceforth, I am moving my rating on Tesla from “Buy” to “Hold” ahead of the October 10 showpiece event!

Key Takeaway: I rate Tesla a “Hold” in the mid-$200s.

Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSLA 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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