Tesla (TSLA) shares moved higher in early Tuesday trading as the carmaker moved to promote one of its key technologies, and potential profit drivers, ahead of next week's crucial first-quarter delivery figures.
Tesla's carmaking division has been a significant drag on the stock's performance this year as CEO Elon Musk's strategy of gaining and maintaining market share through price cuts and discounts continues to eat into its profit margins.
Musk has often said, however, that Tesla is more than just a carmaker, and he has touted the potential of its Dojo supercomputer, its AI ambitions and its lucrative energy-storage division.
"Tesla should really be thought of as roughly a dozen technology startups, many of which have little to no correlation with traditional automotive companies,” Musk told investors earlier this year. He spoke after a set of disappointing first-quarter earnings that included a lack of specific guidance for 2024 profit.
One business unit that Musk has suggested could add early heft to Tesla's profit margins, however, is now starting to emerge as a financial and practical reality.
Tesla's Full-Self-Driving future
Musk told Tesla employees late Monday that it would be "mandatory" for its North American operations to "install and activate" Full Self-Driving software in new Tesla vehicles, and to "take customers on a short test ride before handing over the car."
"Almost no one actually realizes how well (supervised) FSD works," Musk wrote in the memo. "I know this will slow down the delivery process, but it is nonetheless a hard requirement."
All US cars that are capable of FSD will be enabled for a one month trial this week
— Elon Musk (@elonmusk) March 26, 2024
Tesla has claimed to have data based on around 300 million miles of driving, a figure Musk said last year would "soon be billions of miles and tens of billions of miles." That would provide a huge competitive advantage for the company as it ramps up investments in AI and other technologies to harness its potential.
The impact on profit margins could also be notable, given the $12,000 cost addition to a Tesla's average selling price of $45,000. Musk has also said that Tesla is in discussions to license the technology to a "major" original-equipment manufacturer and is "very open to licensing our Full-Self-Driving software and hardware to other car companies."
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Gene Munster, an analyst at Deepwater Asset Management and a longtime Tesla bull, says the licensing of FSD technology could generate as much as $20 billion in annual revenue within five years of the first agreement.
"If Tesla is successful at landing one OEM, the likelihood that other carmakers jump on board is high. It would be a similar dynamic we’ve seen over the past month as seven carmakers have signed up to use Tesla’s charging network," Munster said.
"If in a decade, Tesla has a 10% share of the global auto market (their goal is closer to 20%), the company should be making just over $100 billion in operating income," Munster added. "While these targets are many years away, it illustrates the FSD licensing opportunity is meaningful and worth the wait."
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Tesla Q1 delivery report on tap
Tesla must first navigate next week's update on first-quarter deliveries, which are expected to be hit by soft demand in China and production snags at its newly launched factory in Berlin.
Wall Street forecasts, which are likely to be honed over the coming days, currently peg first-quarter deliveries at between 425,000 and 430,000 units, a 12% quarter-on-quarter decline but a tally that would still be up marginally from the year-earlier period.
Bernstein analyst Toni Sacconaghi lowered his Tesla price target by $30 Tuesday, to $120 a share, while slashing his forecast for first-quarter deliveries by nearly 70,000 units to 426,000.
Quarter to date, "Tesla has experienced soft China/Europe demand and constrained U.S. Model 3 production,” Sacconaghi said. “Despite the stock’s underperformance year to date, we struggle to see a catalyst for Tesla. We expect tepid growth in 2024, as well as 2025, bringing into question the company’s growth narrative.”
Tesla shares were marked 5.4% higher in early Tuesday trading to change hands at $181.91 each.
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