Tesla: Growing Full Self-Driving Liability Could Be Massive

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Last week, shares of Tesla, Inc. (NASDAQ:TSLA) came nether immoderate unit aft it was announced that location would beryllium a recall of nan company's afloat self-driving ("FSD") software. This apt will conscionable consequence successful an over nan aerial update to fulfill regulators regarding what's incorrect pinch nan package package. The electrical conveyance ("EV") shaper is besides nearing different awesome milestone pinch FSD, arsenic it looks to lick autonomy and deed 1 of nan biggest bullish catalysts that galore investors person currently. While overmuch of past week's news sum focused squarely connected what could yet beryllium conscionable a insignificant item, FSD itself could beryllium a monolithic liability for Tesla that seems to beryllium increasing moreover larger.

For those that person followed nan Tesla story, you cognize that CEO Elon Musk has fundamentally talked astir afloat self-driving for almost a decade now. The institution still has not shown disconnected nan U.S. coast-to-coast autonomous thrust that it said would travel by nan extremity of 2017, for instance. As a reminder, Tesla started building vehicles pinch afloat self-driving hardware back successful October 2016. As a constituent of reference, nan floor plan beneath shows Tesla's cumulative accumulation since nan commencement of 2017, excluding possibly 15,000 vehicles aliases truthful produced successful Q4 2016, that would person had FSD hardware equipped.

FSD Production Vehicles

Cumulative FSD Production Vehicles (Company Filings)

Over nan years, location person been aggregate updates to nan afloat self-driving hardware. Each time, location person been questions complete whether aliases not customers would beryllium capable to upgrade their hardware. If so, would those who paid for nan FSD package get nan caller hardware for free? I bring this up because location are those who judge Tesla will not beryllium capable to get to existent afloat self-driving (or imaginable robo-taxis) pinch immoderate of nan earlier versions of this hardware.

The adjacent type of FSD hardware is 4, which could spell into vehicles immoderate time now. Perhaps Tesla will unveil it astatine nan upcoming March 1st investor day. Elon Musk said that a retrofit for existent vehicles is highly improbable for those who person hardware type 3, yet he still believes type 3 will still beryllium bully capable to beryllium safer than nan mean human. For those wondering astir a imaginable retrofit, this Twitter thread shows pictures of these 2 hardware versions. It seems rather evident that you won't beryllium capable to switch 1 for nan other, and it was pointed retired successful nan thread that nan caller hardware will astir apt usage moreover much cameras successful its setup.

The imaginable liability mobility comes into play present if you deliberation Tesla won't beryllium capable to genuinely lick FSD pinch nan existent hardware. One mightiness deliberation that a imaginable suit would conscionable want to refund nan FSD price, and those arguing present mightiness mention nan callback number of vehicles to get a full liability. At an mean costs of $10,000 for FSD, that gets you to astir $4 cardinal erstwhile you see really galore customers person reportedly paid for nan package truthful far.

However, for illustration almost everything other successful this world, things present astir apt aren't that simple. A customer could propose that they bought their Tesla because of FSD's potential, but are waiting to bargain nan FSD package until it's wholly fresh for premier time. By nan extremity of Q1, location could beryllium adjacent to 4 cardinal vehicles that person hardware type 3 aliases earlier. A suit looking for Tesla to repay nan user for nan full vehicle's costs based connected not delivering FSD, utilizing an mean income value of $60,000, would consequence successful a liability of $240 cardinal dollars! That number is astir 11 times nan rate Tesla has connected manus currently, and it represents astir 3/8 of nan company's marketplace cap.

Unfortunately, we're only starting to scratch nan aboveground of really bad things could beryllium if we look astatine a genuinely worst-case scenario. That's because backmost successful early 2019, Tesla held an Autonomy Day, which is wherever Elon Musk famously talked astir having a cardinal robo-taxis connected nan roadworthy by nan extremity of 2020. We are much than 2 years past nan extremity of that almanac year, and location still is not a azygous Tesla robo-taxi connected nan roadworthy presently (ride-sharing operators utilizing Tesla FSD Beta do not count). That gets america to 1 of nan slides Tesla guidance showed astatine that presentation, seen below.


Tesla Robo-Taxi Slide (April 2019 Company Presentation)

Tesla ended up raising much than $10 cardinal successful capital, immoderate whitethorn opportunity to debar bankruptcy, betwixt that position and nan extremity of 2020. There could beryllium a spot of a liability, and perchance moreover criminal charges against guidance there, if 1 is claiming securities fraud. However, that's a statement for different day. What I'm focusing connected present is what consumers would beryllium arguing, based connected nan premise that their Tesla pinch afloat self-driving could go a robo-taxi.

The supra descent suggests that a Tesla robo-taxi would make $330,000 successful gross profits complete nan life of nan vehicle. For this argument, let's presume that vehicles pinch hardware type 3 aliases earlier cannot get to a constituent wherever they are robo-taxis. I opportunity this because 1 Twitter user, who has been a awesome protagonist of Tesla and Elon Musk complete nan years, stated in a tweet that this type will ne'er beryllium capable to thrust astir without quality input. This peculiar Twitter personification is 1 of nan astir salient FSD Beta testers retired there. He's not alone, however, arsenic highly followed Twitter personification Troy Teslike apparently agrees pinch this sentiment that driverless FSD hardware 3 looks unlikely, pinch Tesla apt to effort to get location pinch type 4 for nan foreseeable future.

If you had a people action suit covering those astir 4 cardinal vehicles, and they were each arguing they mislaid retired on, say, $260,000 successful robo-taxi profits (the $330,000 minus an mean $60,000 conveyance costs and nan mean $10,000 FSD cost), we'd beryllium talking astir a small complete $1 trillion. There has been astatine slightest 1 suit truthful acold regarding Autopilot and FSD, though it is very early connected in nan ineligible process astatine this point.

I'm judge skeptics will inquire astir leased vehicles and those that whitethorn person been totaled since. Well, conveyance leasing has only accounted for a mid-single digit percent of Tesla's deliveries complete time. Some of those vehicles could beryllium bought astatine nan extremity of nan lease, aliases turned complete to a 2nd consumer, which could supply a 2nd furniture of liability successful immoderate cases. Also, for my assumptions today, I'm fundamentally saying that vehicles pinch hardware 3 are nary longer produced aft Q1. If that's not nan case, nan number could proceed to rise, offsetting immoderate of these variables. Still, moreover if you want to take, say, 5% disconnected my worst-case scenario, you're still talking astir about a trillion dollars.

On nan competitory side, location has been immoderate absorbing news successful nan autonomous driving abstraction recently. A fewer weeks ago, Mercedes-Benz Group AG (OTCPK:MBGAF) sewage its Drive Pilot strategy to beryllium nan first Level 3 strategy to beryllium certified for US roads. There are 5 levels of autonomous driving, and Tesla's FSD is presently pegged astatine Level 2. Around nan aforesaid time, Consumer Reports came retired pinch its manufacture rankings for various driving assistance packages, and Tesla's FSD ended up successful nan middle of nan pack.

With a marketplace headdress of astir $625 cardinal at Monday's close, Tesla evidently could not salary that overmuch successful damages today, and frankincense bankruptcy could beryllium a possibility. Of course, there'd beryllium plentifulness of appeals if a proceedings were moreover successful, and defendants would effort to locomotion down nan damages per conveyance rather significantly. I should besides constituent retired that Whole Mars Catalog, nan Twitter personification supra talking astir hardware type 3, liked a abstracted tweet quoting his original tweet, that suggested Tesla should beryllium connected nan hook for billions of dollars successful liabilities regarding FSD. I americium not a lawyer, but that liking of nan quoted tweet doesn't look bully erstwhile coming from specified a awesome Tesla protagonist and FSD Beta user.

Tesla banal closed Monday complete $197, down much than 5% connected nan time arsenic nan wide marketplace was deed hard. Interestingly enough, that value is only astir 25 cents distant from nan average value target connected nan Street. At nan moment, I wouldn't beryllium rushing to bargain TSLA shares until we get a clearer image of really near-term request is faring, particularly aft each of nan awesome conveyance value cuts we saw earlier successful nan quarter. I will beryllium looking for that update astatine adjacent week's Investor Day connected March 1, aft which I tin supply much of a clear proposal connected nan stock. I besides would not beryllium shorting TSLA banal up of adjacent week's event, either, arsenic possibly immoderate awesome caller merchandise and work announcements could get investors energized a bit.

Last week, it seemed for illustration everyone focused connected nan callback regarding afloat self-driving for Tesla. However, nan bigger rumor present whitethorn beryllium nan company's inability to get its vehicles to beryllium afloat autonomous by now, particularly fixed each of Elon Musk's erstwhile statements. With hardware type 4 perchance astir to beryllium launched, location could beryllium a batch of imaginable liability present if Tesla, Inc. cannot present what it seemingly promised customers, particularly if you deliberation astir nan monetary anticipation of robo-taxis. While nan thought of imaginable liabilities isn't apt to person immoderate meaningful effect connected nan banal today, this point is 1 imaginable awesome consequence that Tesla, Inc. investors should see for nan agelong term.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Bill Maurer floor plan picture

I americium a marketplace enthusiast and part-time trader. I started penning for Seeking Alpha successful 2011, and it has been a tremendous opportunity and learning experience. I person been willing successful nan markets since simple school, and dream to prosecute a profession successful nan finance guidance industry. I person been progressive successful nan markets for respective years, and americium chiefly focused connected long/short equities. I clasp a Bachelor of Science Degree from Lehigh University, wherever I double majored successful Finance and Accounting, pinch a insignificant successful History. My awesome way focused connected Investments and Financial Analysis. While astatine Lehigh, I was nan Head Portfolio Manager of nan Investment Management Group, a student group that manages 3 portfolios, 1 long/short and 2 agelong only. I person had 2 internships, 1 a summertime internship astatine a ample bank, and different helping to negociate nan Lehigh University Endowment for astir a year. Disclaimer: Bill reminds investors to ever do their ain owed diligence connected immoderate investment, and to consult their ain financial advisor aliases typical erstwhile necessary. Any worldly provided is intended arsenic wide accusation only, and should not beryllium considered aliases relied upon arsenic a general finance recommendation.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Additional disclosure: Investors are ever reminded that earlier making immoderate investment, you should do your ain due owed diligence connected immoderate sanction straight aliases indirectly mentioned successful this article. Investors should besides see seeking proposal from a agent aliases financial advisor earlier making immoderate finance decisions. Any worldly successful this article should beryllium considered wide information, and not relied connected arsenic a general finance recommendation.

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