Cruise Accelerates While Tesla Struggles: Analyzing the Competition
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The Competition for Autonomy
Tesla is currently facing challenges in deploying an effective level 2 driving assistance system. In contrast, Cruise, a subsidiary of General Motors, is preparing to expand its level 4 ride-hailing services. You can learn more about the five levels of vehicle autonomy classification in this detailed article.
Cruise has recently shared promotional videos showcasing their self-driving taxi service, which has been trialed in major cities across the U.S., from San Francisco to Seattle. Residents in San Francisco can now register for the upcoming launch of these autonomous taxis, as linked below.
The advancements made by Cruise, along with the reported data on interventions from other autonomous vehicle companies like Venmo, may cause some concern for Tesla investors. With its high market valuation, Tesla's stock performance hinges not only on the ability to boost electric vehicle sales but also on executing a flawless strategy to capture market share beyond vehicle production.
A pressing question remains: will Tesla maintain a substantial presence in the autonomous driving sector? The outlook appears grim for Elon Musk and his team. Recent developments surrounding Cruise suggest that investors may need to adjust their expectations.
Tesla has never truly dominated the autonomy space, and it is likely that competitors with significant investments in various autonomy sectors (like private autonomous vehicles and ride-hailing services) will outpace them.
Meanwhile, some staunch Tesla supporters on Wall Street may resist adjusting their views. Many analysts, including those at Morgan Stanley and Goldman Sachs, have a vested interest in keeping Tesla's stock price buoyant and continue to project overly optimistic forecasts.
Among the most bullish analysts are ARK Invest, Dan Ives of Wedbush Securities, and Adam Jonas of Morgan Stanley, all of whom maintain ambitious price targets for Tesla's stock. However, as I will discuss further, these valuations rely heavily on the assumed success of Tesla's autonomous driving capabilities—success that seems increasingly implausible given the highly competitive environment.
Cruising Ahead of Tesla
Tesla has marketed its "Full Self-Driving" (FSD) feature as an upgrade for several years. However, this system, only recognized as a level 2 driving assistant by regulators, is far from ready for widespread use. In stark contrast, Cruise, under General Motors' ownership, is moving forward robustly.
In addition to gearing up for the launch of its driverless taxi service in San Francisco, Cruise has secured substantial funding to enhance its operations. Notably, the SoftBank Vision Fund has invested $1.35 billion, known for its strategic investments in disruptive tech firms during pivotal moments.
For context, Tesla’s annual R&D expenditure hovers around $1.4 billion, as per Statista. This latest funding will enable Cruise to broaden its service area and expand its fleet to meet growing demand.
Tesla, on the other hand, has seen Elon Musk make bold predictions about robotaxis. During the 2019 "Autonomy Day," he promised a million robotaxis would be operational by the end of 2020, but a viable self-driving system has yet to be demonstrated. Allowing customers to test a subpar system is insufficient.
Daily, social media showcases numerous instances of beta testers encountering hazardous behavior from the FSD system, with frequent reports of erratic braking in the latest software updates.
A congressional hearing on February 3rd, 2022, aptly illustrated Tesla's position in the market. When questioned about Tesla's absence from the Autonomous Vehicle Industry Association, Ariel Wolf, the association's general counsel, stated:
"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)
The implications of Cruise's advancements for Tesla's future cash flow potential are significant. If Tesla is already perceived as poorly positioned to seize market share in autonomous vehicles, why should its stock be influenced by a mere confirmation of existing beliefs?
Examining Analysts’ Predictions
Adam Jonas currently offers a buy recommendation with a one-year price target of $1,300, representing a potential upside of approximately 44% from the closing price of $905.66 on February 2nd. Dan Ives holds an even more favorable view, with a fair value range of $1,400 to $1,800, suggesting a 55% to 99% increase.
Cathie Wood, the founder of ARK Invest, projected a five-year price target of $3,000, implying a staggering 230% upside. Tesla remains a key asset in the flagship ARK fund ($ARKK or ARK Innovation), and Wood backs her predictions with substantial investments.
It’s important to note that these price targets are not fresh off the press. ARK's target is based on an outdated model from nearly a year ago, which I previously analyzed in greater detail. Anticipate revisions to analyst estimates following Tesla's next quarterly report.
Other optimistic price targets come from Mizuho at $1,300, Oppenheimer at $1,103, and Canaccord at $1,200. Many optimists share the assumption that Tesla will introduce autonomous vehicles in the near future.
For ARK Invest's bullish scenario, which aligns with an ambitious $4,000 price target, they forecast that net revenue from autonomous ride-hailing will reach no less than $327 billion! This assumes Tesla will achieve full autonomy (level 5) within five years and successfully launch a ride-hailing service.
Dan Ives of Wedbush articulated in an interview with Yahoo Finance that:
"FSD ultimately over time is worth $300, $400 a share to the story. So as they continue to execute there, you need more data points, more drivers to participate in the FSD program. That’s going to be a focus of the street over the coming years."
Ives continued, "FSD is really from a bull perspective, a significant part of the Tesla story. That’s why any core bull in Tesla, who has weathered all the challenges, sees them as being in a strong position, especially regarding distribution."
However, these views on FSD's quality and potential are misguided, leading to an inflated estimation of future market share, margins, and profitability for Tesla.
Despite Tesla's recent impressive fourth-quarter financial report, the aforementioned price targets seem unrealistic. Even robust growth in electric vehicle sales cannot justify such valuations.
Elon Musk seems aware of this reality. His sudden focus on humanoids, including developing a robot for production assistance, signals a shift in priorities—an attempt to divert attention away from self-driving technology. He appears to be seeking new avenues to boost the company's valuation.
Previous attempts have included ventures into solar energy, insurance, and battery technologies. Tesla supporters might benefit from recognizing the more conservative viewpoints on Wall Street, where price targets reflect Tesla as a traditional car manufacturer facing escalating competition that will challenge revenue growth and profit margins.
For instance, JP Morgan and Barclays have set a price target of $325, while Citigroup has upgraded its target to $313 after Tesla reported higher-than-expected deliveries in Q4 2021.
In this video titled "STUNNING Data & Bull Case For Tesla Amid Sell Off," insights are provided into the current market dynamics affecting Tesla. This analysis could be crucial for understanding the shifting landscape of autonomous vehicles.
The second video, "TSLA Bull Case by Rob Maurer of Tesla Daily Presented to Northwestern Master's Students + Q&A," offers valuable perspectives on Tesla's future and the evolving market conditions.
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