Sales of electric vehicles (EV) represent more than 81% of You’re hereIt is (NASDAQ:TSLA) total turnover at the moment. The company could sell more than 2 million units this year, making it one of the largest electric vehicle makers in the world.
But tech investor Cathie Wood thinks artificial intelligence (AI) — not electric vehicle sales — is the best reason to own Tesla stock. The company uses AI to develop its self-driving software (FSD), which has already covered billions of real-world miles in beta mode.
Wood’s company, Ark Investment Management, just released a new set of financial models suggesting that electric vehicle sales won’t be the driving force behind Tesla’s success for much longer. With the help of AI, Ark predicts that 86% of the company’s profits will come from something else.
Tesla must expand beyond the passenger electric vehicle sector
Skeptics lined up when Tesla shares went public in 2010. Few investors believed its ambitious CEO, Elon Musk, could successfully design, build and sell electric vehicles. But he proved them wrong and Tesla’s Model Y was the best-selling car in the world in 2023, all categories combined.
But Tesla’s core electric vehicle business is slowing due to slowing demand and growing competition. The company delivered just 386,810 cars in the first quarter of 2024 (ended March 31), down 9% from the year-ago period. Musk did not offer a sales forecast for 2024, but some analysts believe the company will ship 2.2 million units. That will represent growth of just 22%, well below Musk’s goal of 50% annual growth for the foreseeable future.
Tesla had to cut prices by 25.1% throughout 2023 to support demand, and electric vehicle prices fell another 9% across the industry in the first three months of 2024.
Pricing pressure will only worsen due to an increasingly competitive landscape. Most Western manufacturers will struggle to match the production costs of Chinese manufacturers. BYD, for example, which has just launched an entry-level electric vehicle priced at $9,700. In response, Tesla recently revealed plans to launch its own entry-level model in 2025, which could start at $25,000.
But selling cars at that price will cut into Tesla’s profit margins, so the best path forward is to create other businesses to complement its electric vehicles.
Enter robotaxi and FSD software
Tesla is preparing to unveil its robotaxi in August. This is a fully autonomous car designed specifically for ride sharing (think Uber (NYSE:UBER), except without the human driver). However, its success depends entirely on the widespread distribution of the company’s FSD software.
Musk claims that customers have driven more than 300 billion miles with the latest FSD software version 12. But it remains in beta mode, which means the human driver must be ready to take the wheel. However, Ark believes FSD could eventually gain regulatory approval, based in part on its safety record so far.
According to data released by Ark, Teslas in FSD mode crash once every 3,200 miles (on average), compared to the US national average of one crash every 192 miles. In other words, a self-driving Tesla could be 16 times safer than your typical American driver.
FSD could transform Tesla’s economy
Musk wants to create a ride-sharing network within Tesla, where the company can deploy robo-taxis around the clock to generate revenue. Uber spent $16.6 billion paying its human drivers in the recent quarter alone (its largest expense), so if Tesla can eliminate that cost, its ride-hailing service will generate a very high profit margin.
But Tesla will also sell FSD software on a subscription basis to owners of its electric vehicles, and Musk has also floated the idea of ​​licensing it to other automakers. Software as a service often comes with high gross profit margins, sometimes as high as 80%, which could be a game-changer for Tesla’s bottom line, especially as the electric vehicle price war intensifies. intensifies.
Ark believes Tesla will generate $1.2 trillion in revenue in 2029, 63% of which will come from the robot taxi sector alone. Sales of electric vehicles will drop to just 26% of the company’s total revenue, compared to 81% today.
This change could increase Tesla’s profitability, leading to earnings before interest, taxes, depreciation and amortization (EBITDA) of $440 billion in 2029, according to Ark’s models. 86% of this sum is expected to come from the robotaxis segment.
Ark models are very ambitious
Wall Street estimates that Tesla will generate $98.4 billion in revenue in 2024. To reach Ark’s forecast of $1.2 trillion in annual revenue by 2029, the company will need to grow by 64.9% each year (on average) between now and then.
Remember, Musk himself wants to see Tesla grow only 50% per year over the long term, and its yield is significantly below that goal at the moment. Arch models seems very ambitious from this point of view.
Additionally, Uber has 149 million monthly active users on its platform and they have booked rides worth $72.5 billion over the last four quarters. So even if Tesla overtakes Uber to become the world’s largest ride-hailing service, those $72.5 billion in annual bookings won’t do much to increase its revenue to $1.2 trillion.
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 yet been approved by regulators. Even if they get approval, it’s unclear whether people will actually adopt them in the volumes required to meet Ark’s financial projections.
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Anthony DiPizio has no position in any of the stocks mentioned. The Motley Fool has 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 revenue could soon come from them was originally published by The Motley Fool
