Shares of electric-car maker Tesla (TSLA 0.44%) have been on a tear recently. The stock has risen more than 40% since early April, in spite of the company's having reported a huge decline in earnings per share in its first quarter, as automotive revenue fell 20% year over year. Furthermore, management refrained from providing a specific outlook for vehicle sales this year as the company navigates an uncertain economic environment.
So, what has investors so bullish on the stock even as fundamentals suffer? It largely boils down to one thing: big expectations for Tesla's upcoming launch of its Robotaxi service -- or an autonomous ride-sharing network. If the service works, the company could not only benefit from a fast-growing new revenue stream but it could also see a sharp increase in demand for its vehicles. In other words, Tesla's Robotaxi service could change everything for the company -- and the stock.
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Elon Musk's big prediction
Tesla CEO Elon Musk is extremely bullish on the company's plans for autonomous ride sharing.
"My prediction is that, probably by the end of next year, we'll have ... hundreds of thousands if not over a million Teslas doing self-driving in the U.S.," Musk said during a CNBC interview this week.
Putting this upbeat forecast into perspective, Tesla produced only about 363,000 vehicles in its first quarter.
One reason Musk has confidence in this forecast is that it plans to enable some of its existing Tesla owners' vehicles to be deployed into the fleet.
"It's a way for Tesla owners to earn revenue," Musk told CNBC. "Instead of having your car sitting in the parking lot, your car could be earning money."
With the possibility that some of Tesla's existing vehicle fleet will be used for a robotaxi service, the primary bottleneck for rolling out the service won't be production but rather the capabilities of Tesla's vehicle software. Of course, regulations surrounding autonomous driving will be another gating factor.
Tesla plans to launch its Robotaxi service in Austin this June. But the service will be very small at first. Once it is proved to be safe, the company will scale up the service. In addition, it plans to launch the service in other markets over time.
Importantly for investors, this new service could not only create a new revenue stream but it could also reinvigorate demand for Tesla vehicles.
"[T]he advancement in [full-self-driving]-related features, including pilot robotaxi launch in Austin later this year, should help create a new era of demand," said Tesla Chief Financial Officer Vaibhav Taneja in the company's first-quarter earnings call.
NASDAQ: TSLA
Key Data Points
Is it priced in?
Tesla has surprised the market before. Its rise from niche automaker to the dominant electric vehicle brand is one of the most remarkable corporate stories in decades. And with Musk at the helm, the company has a habit of turning long-shot ideas into market-shifting products. But investors would be wise to temper their expectations. Developing and deploying autonomous vehicles at scale is one of the most complex engineering challenges in the world. Regulatory hurdles, safety concerns, and competitive threats all loom large. Even if Tesla launches a Robotaxi service this year, widespread adoption will take time.
That said, if Tesla succeeds -- even partially -- it could create a high-margin, recurring revenue stream that transforms the company's economics. This may help explain why the stock is rallying in the face of weakening fundamentals. Investors aren't buying what Tesla is today -- they're betting on what it might become.
The risks, of course, are high. If the Robotaxi rollout works, that bet might just pay off. But that's a big "if." Further, investors should keep in mind that the stock's recent rise seems to already be pricing in a major revival in the company's growth story. Shares now trade at a price-to-earnings ratio of about 193, a valuation that prices in extraordinary earnings growth for the foreseeable future. On the other hand, if Musk's ambitious vision for an autonomous ride-sharing network goes as well as he expects it to, the stock could have a lot more room to run.
