If there's one thing that's clear from Tesla's (TSLA 1.86%) second-quarter earnings report, it's that everything is riding on its full self-driving (FSD) system. As such, investors should view Tesla as a risky growth stock, albeit one that's favorably positioned in an end market that the rest of the automakers continue to chase and have invested billions in. Here's why FSD and Tesla's robotaxis are the key to understanding the investment proposition and why I predict their successful development could lead to huge returns for investors.

Tesla is more than a car company

There's no point tiptoeing around the elephant in the room. Tesla's sales this year have not been what management would have hoped for. Moreover, CEO Elon Musk is clear that Tesla could face "a few rough quarters" as relatively high interest rates make car-buying less affordable, and the removal after Sept. 30 of a federal tax credit of up to $7,500 for eligible electric vehicles (EVs) will negatively impact sales.

As such, Tesla's sky-high valuation (it trades at 191 times Wall Street earnings estimates for 2025) is often used as a stick to beat the stock with. That's fair enough, and valuations always matter. Still, the key to the investment case has long been Tesla's potential to develop a highly lucrative stream of revenue from selling FSD and its robotaxi business.

FSD and robotaxis are integral to the EV business and should not be viewed as optional add-on "moonshot" businesses. I have four reasons why.

A successful robotaxi rollout will improve FSD adoption

Musk plans to aggressively, but safely, roll out Tesla's nascent robotaxi service (which uses an updated version of FSD not available to the public yet). While Musk's plan to have autonomous ride hailing available to "half of the population of the U.S. by the end of the year" -- if regulators approve -- is questionable, there's little doubt Tesla will expand the service when possible.

The interest created by Teslas robotaxis is likely to increase awareness of the value and optionality of Tesla's publicly available FSD. Indeed, CFO Vaibhav Taneja noted that "we've started seeing an uptick in FSD adoption in North America in recent months." That's something that could increase as public awareness of FSD increases due to robotaxi rollouts.

A sign saying PLAN AHEAD.

Image source: Getty Images.

Tesla's Cybercab plans depend on a successful robotaxi roll out

The dedicated robotaxi vehicle called Cybercab is central to Tesla's plans, and management continues to expect "volume production starting in 2026." Here again, the successful development of Tesla's robotaxi service (which currently runs with Model Ys) is an integral part of the plan. There's no point scaling up Cybercab production if the robotaxi rollout isn't working.

Musk believes the Cybercab could get the cost of a taxi under $0.30 per mile over time -- something that would revolutionize the taxi industry.

Tesla's EVs become more attractive with unsupervised FSD

Tesla's EVs will become more attractive, more affordable, with unsupervised FSD. And with robotaxis driving increasing awareness of FSD and the possibility of unsupervised FSD in the future, allowing Tesla owners to convert their vehicles into robotaxis, the value of a Tesla EV should increase in the eyes of customers. As such, FSD is also something that can improve Tesla's sales in the future.

FSD may be needed to secure financing

The earnings call contained an interesting question on how Tesla would finance scaling the robotaxi business, a particularly relevant question given that declining sales led to Tesla's free cash flow coming in at just $146 million in Q2. To be fair, Tesla has $29.6 billion in net cash (roughly equivalent to three years' capital spending) and is still generating cash.

Still, if Tesla needs to seek financing, it would need to demonstrate a stream of cash flow from FSD and robotaxis to facilitate that.

A couple planning finances with a laptop and a notebook in their kitchen.

Image source: Getty Images.

Can buying Tesla stock set you up for life?

There's no guarantee Tesla will develop publicly available unsupervised FSD nor that the robotaxi concept and scaling will work, nor that Cybercab will be successful. In addition, Tesla could face additional costs from possibly needing to upgrade older hardware models (Hardware 3) to be able to use unsupervised FSD in the future.

There are hurdles to overcome, and everything rides on unsupervised FSD, so Tesla is a risky stock.

But here's the thing. The robotaxi market is being chased by Alphabet, Amazon, General Motors, Volkswagen, Baidu, and others, and Tesla remains the company that looks best placed to succeed in the market commercially. It has the financing, the EV market leadership, and potentially, the technology to do so. It's a risky investment, as everything rides on unsupervised FSD, but it's also one with potential reward, and such investments have a place in an aggressive investor's portfolio. Just be prepared for volatility if you buy in.