New Tesla Price Target Might Overlook Robotaxi Red Flag

Tesla TSLA trades at a stratospheric valuation for one main reason: Investors believe in the company’s prospects in autonomous driving technology and robotaxis. 

While Tesla’s vehicle sales are an essential stock driver for sentiment, prospects for car sales may account for 10% to 20% of the valuation — $80 billion to $160 billion of auto business market cap. Reasonably, 40% to 50% of TSLA can be attributed to the potential of robotaxis — currently, over $300 billion in market cap is already baked in.

Wedbush’s Dan Ives thinks robotaxis are a $1 trillion opportunity. He believes Tesla will “own the autonomous market in the U.S. and globally” as part of his 12-month $550 price target.

Yet, considering the recent brand erosion, investors and analysts may be buying into a mirage of a business — a robotaxi operation that may never materialize on a broad scale. The nationwide Tesla protests prompted by a backlash against Elon Musk bring the concept of a successful large-scale robotaxi business into serious question. One of the lessons from Cruise’s failed robotaxi business is the need for broad public support. It’s not far-fetched to believe Tesla may have difficulty gaining the necessary widespread support, especially with a viable competitor in Waymo, a division of Alphabet GOOGL.

The Achilles heel of Tesla’s robotaxis is that they’re likely remarkably susceptible to disruption by protesters and agitators. Since Tesla’s robotaxis only uses cameras, disabling them in seconds through sabotage doesn’t seem complicated, perhaps merely using Post-It notes. A citywide welcome of any robotaxi service that is easily disrupted can quickly turn into a repudiation of the service.

Cruise learned the hard way that public and regulator acceptance can wear thin if robotaxis are getting stuck and impeding traffic flow, especially for emergency responders. A revolt against Cruise in San Francisco destroyed several of their vehicles, and many were temporarily disabled by traffic cones placed on the hood. Nonetheless, General Motors GM shares never baked in much, if any, valuation premium for their Cruise subsidiary, and shareholders were never particularly hurt when GM opted to abandon robotaxis to develop the technology for driver assistance instead.

On the other hand, Investors and analysts in TSLA have opted to bake in massive robotaxi success in the current valuation and heady price targets. However, shareholders face enormous risks that Tesla’s service may be far less widespread due to a lack of acceptance in many regions.

Some would reasonably argue that technological advancements will ultimately win out and that acceptance will come with time. The regions where Tesla’s robotaxis are fully adopted may have more appeal, making regions rebelling against them seem backward. Still, Waymo has expanded its service by 10x yearly since 2019 and offers a viable alternative with much less controversy. Time will tell.

Tesla’s recent stock slide captures some brand erosion and vehicle sales declines. Yet, the market underestimates that Musk’s antics have potentially serious detrimental consequences for TSLA outside of car sales. The stock valuation assumes too many things go right in robotaxis and doesn’t reflect potential real-world obstacles. Investors may want to recalibrate the increased risks that Musk’s controversial foray into global politics — where Musk admitted the hatred directly toward Tesla shocked him — damages Tesla’s robotaxi prospects and exposes its Achilles heel.

Some skeptics believe Tesla’s robotaxis are still years away due to technological hurdles posed by the lack of redundancy in their safety features. John Krafcik, CEO of Waymo from 2015 to 2021 (granted, not the most independent voice), believes that sensor technology, such as lidar and radar, is critical to preventing high-speed nighttime accidents. He believes that without these features, Tesla’s self-driving capabilities will continue to disappoint in real-world driving, lagging well behind Waymo.

While Waymo is far ahead in robotaxis, the valuation of the service is pegged between $50 billion to $60 billion. Last October, Waymo raises $5.6 billion in capital at a valuation of $45 billion. At Tesla’s current valuation, the shares arguably bake in a robotaxi value 7x to 10x Waymo’s recent funding round.

While much has been made of the fact that TSLA shares have been flat for the last five-plus years, the market cap has increased by over $100 billion in that time through option grants and small acquisitions, diluting shares by about 20%.

To be clear, I don’t advocate or endorse creating any situation where traffic is disrupted — which puts lives at risk — but I’m pointing out that severe disruptions in service can befall Tesla when they send unsupervised robotaxis on the road. I believe in the importance of self-driving technology, but realistically, there’s a human element that shouldn’t be ignored. While still bullish on the shares, Ives recently warned that Musk has driven Tesla into a crisis, and unless he changes course, longer-term brand damage can result.

While investors dream of millions of Tesla’s robotaxis roaming around globally, creating massive income, it’s just as easy to imagine an unpopular brand seeing massive service disruptions through easily immobilized vehicles, leading to regional rejections of its robotaxis. Perhaps there will be more redundant safety features in Tesla’s robotaxis than disclosed, allowing for smoother operations. Still, at this point, it’s impossible to know, so investors may need to take a more conservative approach to how much robotaxi success they bake into the shares, already in the hundreds of billions. 

At a minimum, investors may want to see the service operating before they get carried away trying to value all the robotaxi potential.

At the time of publication, Ginesin was long GM and GOOGL