2025 could be the year the autonomous driving revolution takes off in earnest. After all, Alphabet's (GOOGL +1.36%) (GOOG +1.24%) Waymo is currently on the road in several cities, with some analysts concluding that it has already overtaken Lyft in areas of San Francisco where Waymo operates.
Meanwhile, Tesla's (TSLA 0.70%) autonomous robotaxi service is set to launch next month in Austin, Texas. This will be a huge deal for both Tesla's and Alphabet's shareholders, as many believe Tesla will be the eventual winner in the space. However, the launch will be of absolutely massive importance to Tesla shareholders, as the bulk of Tesla's valuation appears tied to this autonomous robotaxi opportunity.
Thus, next month's launch will have huge consequences for Tesla's stock. But will Tesla really dominate this emerging industry?
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Elon Musk makes a bold prediction
Tesla is set to officially launch its autonomous robotaxi service in Austin, Texas, in June. In a recent CNBC interview, Musk gave a very bullish outlook on the new service, saying he believed that by the end of 2026, there would be hundreds of thousands, if not a million, Teslas doing self-driving in the United States.
That appears to be an astronomical amount, given there are only a bit over 1,500 Waymos on the roads today in Phoenix, Los Angeles, San Francisco, and Austin. Of course, Musk was discussing not only robotaxis but also existing owned Teslas equipped to use the company's full self-driving software.
Tesla's potential cost advantage and big opportunity
It should be noted that while Waymo is given very little credit as part of Alphabet's stock value, a huge amount of Tesla's valuation rests on the self-driving robotaxi opportunity. After all, Tesla's stand-alone auto sales are struggling.
At the beginning of 2023, revenue growth started to decelerate, and that negative momentum has recently snowballed into outright revenue declines. Last quarter's deliveries were down a whopping 13%, and trailing-12-month earnings per share have more than halved.
TSLA Revenue (Quarterly) data by YCharts. EPS = earnings per share.
Needless to say, these results alone, with earnings of $1.82 (and falling) over the past 12 months, clearly do not justify a stock price anywhere close to $334 as of this writing. But Tesla bulls such as Cathie Wood believe Tesla can become a multibagger mainly on the back of the autonomous robotaxi opportunity.
Wood's firm, Ark Invest, published an analysis of Tesla last year, valuing the stock at a whopping $2,600 per share. However, the rub of that ambitious price target is that Ark believes 90% of that future value will come from autonomous robotaxis, not car sales.
That's because Ark believes autonomous robotaxis will be a massive market and that Tesla will dominate. This is likely due to the belief not only in Tesla's full self-driving technology but also in its cost advantages over potential competitors.
This is where the Tesla bull case potentially has legs. According to Elon Musk, Tesla's costs per operating mile for its self-driving fleet are 20% to 25% of Waymo's. This is due to the higher cost of Waymo's sensor suite, which includes cameras, lidar, and radar, versus Tesla's camera-only approach, as well as Tesla's mass production capabilities. That analysis has also been reflected by other analysts, such as artificial intelligence (AI) analyst James Douma, who noted the biggest cost differential between the two services was the depreciation on the vehicle and sensor hardware.
With a cost advantage, Musk believes Tesla can achieve up to 90% of the autonomous driving market share. While estimates for the autonomous robotaxi market vary widely, some analysts put the opportunity as high as $450 billion by 2033. For Cathie Wood's part, Ark estimates Tesla's robotaxi revenue will reach between $600 billion and $950 billion by 2029. That would likely amount to a huge market share of a big market in just four years' time.
NASDAQ: TSLA
Key Data Points
But there's a case that Waymo may be underrated
The danger for Tesla investors is if next month's initial rollout doesn't go as well as expected or its robotaxi service isn't as superior to Waymo's as many think it will be.
The first danger, obviously, is if there is a safety issue. Keep in mind that Waymo had its initial robotaxi trial all the way back in October 2020 in Phoenix. So, Waymo had a five-year head start on Tesla before it carefully and methodically expanded to San Francisco, Los Angeles, and then Austin. As of last month, Waymo was making 250,000 rides per week, with each ride adding to its driver's intelligence and reputation for safety.
While Tesla's clearance for its Austin launch shows Tesla has proven its safety bona fides to some extent, investors really won't know how safe it is until it gets its robotaxi service on the road. In another CNBC interview on Wednesday, Waymo CEO Tekedra Mawakana appeared to question how Tesla's camera-only approach would perform at night, implying that Tesla's cameras may miss things that Waymo's radar and lidar sensors would pick up in extreme darkness.
Furthermore, Waymo's higher costs aren't fixed at today's levels -- they're also set to decrease. In an interview with Business Insider last week, Waymo's first CEO, John Krafcik, said that in the long run, sensor costs will come down and ultimately be a "trivial" portion of Waymo's total cost per mile.
Instead, the bigger cost is that of producing vehicles, which Waymo currently buys from Jaguar in low volumes. This is in contrast with Tesla, which already has established, vertically integrated mass manufacturing.
But Waymo just announced on May 5 that it's opening a new autonomous vehicle factory for its Jaguar I-Pace vehicles in Phoenix, Arizona. The new autonomous plant will produce another 2,000 vehicles this year, more than doubling the 1,500-vehicle fleet already on the road. The company also said the new plant would eventually scale up to tens of thousands of Waymo riders per year, which should drive down costs per vehicle.
The rubber is about to meet the road for Tesla
With Waymo's current momentum, five-year head start, and improvements to its mass manufacturing on the way, Tesla is under a lot of pressure to deliver when it unveils its robotaxi service next month. Keep in mind, Tesla's initial service will comprise only 10 to 20 vehicles. However, that will still be an important starting point for both Tesla and Alphabet investors to begin monitoring the unfolding robotaxi battle for the months and years ahead.
