Is Wall Street Vastly Undervaluing Tesla?

If you have used Open AI or any other artificial intelligence application, it likely blew your socks off the first time. Yet as impressive as any of these tools available to the wider public are, they don’t yet compare to the artificial intelligence capabilities in-house at Tesla.

That’s because Tesla isn’t scanning the web for data sources and distilling information into a text outlay or a graphical one, but rather is scanning the real world in real-time to make life and death decisions. 

The advancements made so far by Tesla are just a drop in the ocean compared to what they are likely to be in coming years. For now, Tesla cannot simply flip a switch as CEO Elon Musk would like and turn all Tesla cars into autonomous driving vehicles. That vision and day is yet to be realized.

What we do know is Musk has confidently stated that Tesla’s artificial intelligence is the best in the world and under-appreciated, a proxy perhaps for saying undervalued.

Those AI capabilities have enormous potential that Wall Street may not yet have factored in. Yet there’s much more under the hood to like about Tesla’s prospects.

Tesla Has a Wider Moat Than Skeptics Think

While naysayers have historically taken shots at Tesla for being nothing more than an overhyped and overvalued car manufacturer, the truth may be starkly different.

Yes, of course, Tesla makes cars but it does so in an entirely different way to most legacy makers. While their factories are purpose-built to produce hardware, Tesla is built with a software-first mindset. That may seem like a nuance to the casual observer but it’s a big distinction.

The software-first approach means that legacy car manufacturers cannot easily catch up to the regular upgrades and software updates that regularly improve the performance of Tesla vehicles. 

In fact one legacy car manufacturing CEO came out and stated bluntly how hard it was to compete at first because parts were being sourced from hundreds of suppliers, and none of the parts spoke to each other, and to make changes required violating patents or getting approval to make changes – a tedious and time-consuming process. 

Quickly, the legacy car makers realized they too would need to build the components in-house yet Tesla had a multi-year lead on software and supply chain, as well as manufacturing logistics.

Legacy plants, by contrast, were going to need to be fully re-tooled to build an entirely new type of car. And worse still, they didn’t have the expertise under their corporate umbrellas to make the necessary and massive changes.

The competitive advantage Tesla has against other car companies ensures it deserves a premium to them but it’s just the tip of the iceberg of its capabilities.

1 Trillion Reasons To Buy Tesla

While skeptics have focused on the profit and loss statement of Tesla for some time, Musk has been focused on the business model that is by no means static.

At first, Tesla was a car company, but the AI it has built can be applied to other hardware.

At a high level the artificial intelligence built by Tesla scans the outer world to control a hardware device. Musk sees that an application of that software expertise beyond cars is humanoid robots.

Tesla’s Optimus program aims to capitalize on this capability and, last week, Musk declared his vision for what’s possible.

He believes the ratio of humanoid robots to people will be 1:1 at a minimum and more likely 2:1. While there will be at-home applications, he claims, where robots teach kids and even mind them, they will also see extensive use and find a broad need in business, especially factory work.  

If 1 billion humanoid robots are built, a conservative estimate in Musk’s view, and Tesla captures a 10% share of the market, which again he deems reasonable, Tesla is likely to produce an astonishing $1 trillion in profits from that initiative alone.

The math by which he gets there is by multiplying the number of units produced by a margin Tesla will enjoy when selling each one. He believes it’s possible to produce them at $10,000 per robot and sell them for $20,000, generating a $10k profit times 100 million units, or $1 trillion.

At first glance $20,000 per robot may seem far-fetched but keep in mind that $20k is a lot cheaper for a business than an employee who comes with perhaps a salary that 2-3x higher and has all the other associated costs, such as benefits.

The Robotaxi Call Option

Beyond Optimus and the additional AI opportunities that Tesla can exploit over the next decade, Cathie Wood seems to believe that the Robotaxi optionality will prove highly lucrative for investors.

Her estimation is that robotaxis will be a catalyst to a price rise of close to 10x, which Musk himself has said is extremely ambitious but perhaps possible.

That would translate to Tesla growing from a half trillion dollar market capitalization today to a near $5 trillion market cap.

If Musk’s own forecast is realized for Optimum, Tesla would be very unlikely to ever trade at under 10x earnings meaning that the humanoid robot growth vector alone would turn it into a $10 trillion company excluding the car sales. 

Will these seemingly outlandish price targets be realized?

What Is Wall Street Saying About Tesla?

The consensus on Wall Street among 41 analysts is that Tesla is fully valued at $182.88 per share.

Indeed, investors as a whole were skeptical of Elon Musk’s claims about Optimus, selling off the stock by 2% following his announcement of a full $1 trillion in profit potential from humanoid robots alone.

There are good reasons to be dismissive of his forecasts. After all, the promise of robotaxis has long been made and yet to be fulfilled. But Musk has demonstrated many things to engender some level of confidence.

For one, Tesla already has the AI that is likely sufficiently good for humanoid robots, even if not for cars. Secondly, it has the expertise in-house to manufacture at scale and sell around the world. And thirdly, demand for humanoid robots is likely to be high among enterprises who can replace expensive labor in an inflationary environment with lower cost, equally capable, machines.

So, while Tesla is fully valued now in the eyes of investors broadly and Wall Street too, the next ten years may well prove all of them to be overly pessimistic if any one of the optionalities under the hood come to fruition.

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