Cruise Tears The Tesla Bull Case Apart
Cruising Ahead of Tesla
Tesla has sold “Full Self-Driving” (FSD) as an add-on to their vehicles for years. But the system, which is only declared a level 2 driving assistant system to regulators, is still far from ready for the roads.
Cruise on the other hand — a company owned in majority by General Motors — appears to be firing on all cylinders.
Apart from entering the last phase of marketing before rolling out its driverless taxi service in the first location, San Fransisco, they just raised additional cash to scale the business.
And not from anybody. The SoftBank Vision Fund, notorious for early and large investments in disruptive technology firms at key inflection points, has contributed $1.35 billion.
For perspective, Tesla’s total R&D spend sits at around $1.4 billion per year, according to Statista.
The investment means Cruise can quickly scale its business to cover more locations and expand its fleet to satisfy demand.
The investment is part of an old deal, with SoftBank having already posted money in the project in the early stages. The current cash injection was reserved for the moment when Cruise was ready to deploy a commercial fleet.
Microsoft and Walmart are also invested in Cruise.
But where is Tesla?
Elon used to talk a lot about robotaxis. In fact, at the 2019 “Autonomy Day” event at Tesla, he promised a million robotaxis on American streets at the end of 2020.
They have yet to showcase a well-functioning self-driving system despite them shilling their FSD add-on for years.
Letting customers beta test a flawed system is not going to cut it.
Every day, multiple videos of beta testers experiencing poor (and dangerous) detection and driving by the FSD system are posted on social media (see for example here).
There are also reports of frequent phantom breaking in the latest edition of the software.
The position of Tesla in the competitive landscape was perfectly captured in a congressional subcommittee hearing on February 3rd, 2022. The hearing was entitled “The Road Ahead for Automated Vehicles.”
When asked by a committee member why Tesla was not a part of the Autonomous Vehicle Industry Association, the general counsel of the association, Ariel Wolf had the following to say:
“Tesla is not a member of our association because it is not an autonomous vehicle technology, it is a driver assistance technology.”
(Ariel Wolf, general counsel of AVIA)
But what does the Cruise news mean for market expectations toward Tesla’s ability to generate cash flow in the future?
If it is already well known that Tesla is not well-positioned to capture market share in autonomous vehicles, why should the stock be sensitive to what is simply confirmation of consensus?
Let us turn to the analysts.
The Tesla Price Targets and Their Cardboard Foundations
Adam Jonas currently has a buy recommendation with a one-year price target of $1.300. That is a ~44 percent upside from the closing price of $905.66 on February 2nd.
Dan Ives is even more optimistic about the future of electric vehicle makers. His fair value lies in the interval of $1.400 — $1.800 (~55 to 99 percent upside).
Cathie Wood, the founder and head of ARK Invest who shills high beta technology ETF’s to retail investors, said she had a five-year price target of $3.000 as her base case back in September (~230 percent upside).
Tesla has long been a top holding in the flagship ARK fund ($ARKK or ARK Innovation). At least Cathy puts her money where her mouth is.
Note that none of the above price targets are hot off the press.
The price target of ARK is based on the ridiculous model from almost a year ago, which I at the time covered in more detail here.
ARK Invest’s Tesla Model is the New Laughing Stock Amongst Investors
From the misuse of Monte Carlo simulations to ridiculous assumptions, critics have a hard time keeping a straight face
The sell-side analyst estimates are bound for revision after the next Tesla quarterly report.
Other notably generous price targets are Mizuho at $1.300, Oppenheimer at $1.103, and Canaccord at $1.200.
Common for many of the optimists are assumptions of Tesla delivering autonomous vehicles within the foreseeable future.
Is ARK Invest’s bull case (which is associated with a whopping $4.000 price target), they assume net revenue from autonomous ride-hailing at no less than $327 billion! Naturally, they assume Tesla will achieve true full self-driving (level 5) within those five years — AND scale a ride-hailing service on top.
Dan Ives of Wedbush had the following to say in an interview with Yahoo Finance:
I mean FSD ultimately over time is worth 300, 400 hours a share to the story. So as they continue to sort of execute there, but you need more data points, more and more drivers to participate in the FSD program. And that’s going to be a focus of the street over the coming years.
But FSD, I mean that’s sort of the cherry on top of the sundae. That’s really from a bull perspective, a big part of the Tesla story. And that’s why for any core bull in Tesla that’s been through all the battles over the last few years, you know they’re just in a position of strength here, especially when it comes to distribution that moat.
We have a $1,400 base target. And there’s nothing we see here in any way changed our bull thesis.
(Dan Ives of Wedbush Securities, December 29, 2021.
These views of the quality and prospects of FSD are completely misguided. It leads the bullish analysts to greatly overestimate the future market share, margins, and thus profitability of Tesla.
Even with the solid fourth-quarter financial report recently released by Tesla, the above-mentioned price targets are ludacris. Stellar growth in electric vehicle sales is not enough to support such a valuation.
Elon Musk knows it.
His suddenly talking about humanoids like developing a robot for production assistance is suddenly the most important thing for Tesla, is an acknowledgment of defeat.
He needs to divert attention away from self-driving. He needs a new air-castle to inflate the valuation of his business.
It has been tried before with solar, insurance, and batteries.
Perhaps the Tesla bulls should look to the reasonable part of the street where price targets are more modest and reflect that Tesla is a car company — a car company that will face ever-increasing competition challenging both revenue growth and auto gross margin going forward.
For example, JP Morgan and Barclays both have a price target of $325 while Citigroup has a target of 313 — an upgrade after Tesla reported larger than expected deliveries in 2021Q4.