A Maturing Autonomous Driving Market Can Lift Tesla Stock

  • Tesla apparently books handsome profits on its autopilot solution that the company launched last year.
  • The NTSB has been lobbying hard to make collision-avoidance systems mandatory on all U.S. vehicles.
  • How will a maturing autonomous driving industry change fortunes of Tesla stock?

Few technologies have analysts’ opinion divided quite like self-driving car technology is doing right now. On one hand, some analysts hail the technology as the next big thing while others such as Citron Research have been dismissing it as just another big hype a la 3D Printing technology. But whereas only time will tell whether or not self-driving cars will one day become mainstream on our roads, the fact of the matter is that plenty of top tech giants have already expressed their interest in the technology, with some such as Apple (NASDAQ:AAPL) and Alphabet Inc-C (NASDAQ:GOOG) already having sunk huge amounts of money to develop their own versions of self-driving cars. Tesla (NASDAQ:TSLA) is one of the leading automakers with big self-driving car ambitions. Tesla already builds autopilot capabilities into Model S, and plans to do the same with Model X.

In October 2014, Tesla started equipping Model S with hardware such as 12 long-range ultrasonic cameras designed to sense objects within 16 feet of the car in all directions at all driving speeds; a forward-looking camera; and high-precision digitally controlled electric assist braking system. A Model S that is fitted with Tesla Version 7.0 software can take over driving functions from the driver in special circumstances such as highway driving, allow the vehicle to steer within a lane, change lanes with a simple turn signal, avoid collisions from the front and sides, scan for parking space and alert the driver when space is available, parallel park on the driver’s command, and manage the vehicle’s speed by using active, traffic-aware cruise control.

It’s a pretty impressive package for a first iteration solution. Tesla says that its autopilot solution was fully-developed in-house using the most advanced component technologies from Mobileye (NYSE:MBLY). Drivers who have tried out Tesla’s autopilot feature have reported being impressed by how well it performs.

But Tesla is not that impressed with its current solution. Tesla’s CEO says that ultimately Tesla plans to develop a fully-autonomous vehicle that drives itself 100% of the time in about 5-6 years. A recent story surfaced that Tesla's CEO Elon Musk had talked to a young software engineer, who had managed to develop a self-driving car in his garage, about working for Tesla. Responding to the claims, Raymond James' Tavis McCourt made some interesting comments about Tesla’s autopilot solution:

"We would note that Mobileye’s development of algorithms for autonomous driving also utilizes artificial intelligence, deep learning, and all the latest and greatest buzzwords ... from what we
can tell from the article, Hotz is utilizing very similar development technology as Mobileye, but with 1/100th the number of engineers and giving Mobileye a 16-year head start. The solution also does not appear to be price-disruptive as Hotz mentions a $1,000 price point in the article. All-in costs of Mobileye single-camera solutions (including tier-1 integration) is roughly $100 today, so an eight-camera configuration for autonomous driving would likely be at or even cheaper than what Hotz appears to be proposing."

Mr. McCourt then proceeded to say that Tesla’s gross profit margin on its autopilot solution could be well over 95%. Now, Tesla sells its autopilot solution for $3,000, implying Tesla could be booking a gross profit of more than $2,850 for every autopilot solution sold. That gross profit margin figure mentioned by McCourt might appear high at first. But when you look at Mobileye’s gross margin and compare it with Tesla’s, the figure does not look stretched. Mobileye sells advanced driver-assisted systems, or ADAS, as well as ADAS chips to companies such as Tesla, effectively meaning it’s both a software and hardware company. Mobileye’s gross margin sits around 75%, just a shade below the 80% average for SaaS companies. In comparison, Tesla’s gross margin is a lowly 30%.

The high gross margins that Tesla books on its first-generation autopilot solution is impressive due to the implications of what it can do for Tesla's bottom line. Tesla reported a net loss of $47 million on 11,532 vehicles sold during the last quarter. That implies that Tesla lost about $4,000 per vehicle. Throw in a $2,850 gross margin from Tesla’s autopilot solution and Tesla’s losses per vehicle suddenly fall by 70%. That kind of margin improvement will be highly positive for Tesla stock price.

In its third quarter letter to shareholder, Tesla said that its autopilot solution was one of the key reasons its sales had been impressive lately. Drivers apparently love the things the solution is able to do. But another industry catalyst could soon help Tesla sell a lot more autopilot solutions before long. The NTSB has been lobbying hard to make collision-avoidance systems mandatory on all U.S. vehicles saying that the systems had been proven to significantly cut down vehicle accidents.

Earlier in the year, 10 leading U.S. automakers, representing 57% of small vehicle sales in the country, voluntarily agreed to make collision-avoidance systems a standard feature in their upcoming models. If the NTSB gets its wish, Tesla might finally be able to sell its autopilot systems with all its new vehicles, which could change the game for Tesla in a big way. NTSB proposal will improve Tesla's margins and boost Tesla stock price.

Brian Wu Brian Wu   on Amigobulls :
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