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Tesla makes money selling electric vehicles, but 86% of its earnings could soon come from that
Electric vehicle (EV) sales represent more than 81% of Tesla(NASDAQ: TSLA) total revenue at the moment. The company could sell more than 2 million units this year, making it one of the largest EV manufacturers in the world.
But technology investor Cathie Wood believes artificial intelligence (AI) – not electric vehicle sales – is the best reason to own Tesla shares. The company is using AI to develop its fully autonomous driving (FSD) software, which has already completed billions of real-world miles in beta mode.
Wood’s company, Ark Investment Management, just released a new set of financial models suggesting that EV sales won’t be the driving force of Tesla’s success for much longer. With the help of AI, Ark predicts that 86% of the company’s earnings will come from something else entirely.
Image source: Getty Images.
Tesla needs to expand beyond the passenger electric vehicle business
Skeptics lined up around the block when Tesla shares went public in 2010. Few investors believed in its ambitious CEO, Elon Musk, could successfully design, build and sell EVs. But he proved them wrong, and Tesla’s Model Y was the best-selling car globally in 2023 across all categories.
But Tesla’s core EV business is slowing due to declining demand and growing competition. The company delivered just 386,810 cars in the first quarter of 2024 (ended March 31), marking a 9% decline from the same period the previous year. Musk didn’t offer a sales forecast for the full year 2024, but some analysts believe the company will deliver 2.2 million units. This will represent growth of just 22% – far below Musk’s target of 50% annual growth in the near future.
Tesla had to reduce prices by 25.1% throughout 2023 to support demand, and EV prices declined by a further 9% industry-wide in the first three months of 2024.
The pressure on prices will only worsen due to the increasingly competitive scenario. Most Western manufacturers will have difficulty matching the production costs of China-based manufacturers. BYD, for example, which just launched an entry-level EV priced at $9,700. In response, Tesla recently revealed plans to launch its own base model in 2025, which could start at $25,000.
But selling cars at that price will squeeze Tesla’s profit margins, so the best way forward is to build other businesses to complement its EVs.
Enter robotaxi and FSD software
Tesla is preparing to launch its robotaxi in August. This is a fully autonomous car designed specifically for ride-hailing (think Uber (NYSE: UBER), except without a human driver). However, its success depends entirely on the widespread release of the company’s FSD software.
The story continues
Musk says customers have driven more than 300 billion miles with the latest version 12 of the FSD software. But it remains in beta mode, meaning the human driver must be ready to take the wheel. However, Ark believes FSD could eventually win regulatory approval, in part based on its safety record so far.
According to data published by Ark, Teslas in FSD mode crash once every 3,200 miles (on average), compared to the U.S. national average of one crash every 192 miles. In other words, a self-driving Tesla could be 16 times safer than a typical American driver.
FSD could transform Tesla’s economics
Musk wants to create a transportation network within Tesla where the company can deploy robotaxis 24 hours a day to generate revenue. Uber spent $16.6 billion paying its human drivers in the last quarter alone (its biggest expense), so if Tesla can eliminate that cost, its ride-hailing service will have a huge profit margin. high.
But Tesla will also sell FSD software on a subscription basis to owners of its EVs, and Musk has floated the idea of licensing it to other automakers as well. Software as a service often comes with high gross profit margins – sometimes as high as 80% – so this could be a game changer for Tesla’s bottom line, especially as the EV price war heats up.
Ark believes Tesla will generate $1.2 trillion in revenue by 2029, with 63% coming from the robotaxi business alone. Electric vehicle sales will fall to just 26% of the company’s total revenue, compared to 81% today.
This change could increase Tesla’s profitability, resulting in earnings before interest, taxes, depreciation and amortization (EBITDA) of $440 billion in 2029, according to Ark’s models. 86% of this is expected to come from the robotaxi segment.
Ark’s models are very ambitious
Wall Street estimates that Tesla will generate $98.4 billion in revenue in 2024. To meet Ark’s forecast of $1.2 billion in annual revenue by 2029, the company will have to grow 64.9% every year. years (on average) until then.
Remember, Musk himself wants to see Tesla only grow 50% per year over the long term, and its performance is significantly below that target at the moment. Ark Models seems very ambitious from this perspective.
Additionally, Uber has 149 million monthly active users on its platform, and they have booked rides worth $72.5 billion in the last four quarters. So even if Tesla overtakes Uber to become the world’s largest ride-hailing service, that $72.5 billion in annual bookings won’t do much to boost its revenue to $1.2 billion.
Simply put, I don’t think Ark’s models will reflect reality in 2029. Keep in mind that neither the robotaxi nor the FSD software have actually been approved by regulators yet. Even if they gain approval, there’s no telling whether people will actually adopt them in the volumes needed to meet Ark’s financial forecasts.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends BYD Company, Tesla, and Uber Technologies. The motley fool has a disclosure policy.
Tesla makes money selling electric vehicles, but 86% of its earnings could soon come from that was originally published by The Motley Fool