In early February, Wolfe Research analyst Emmanuel Rosner published a report detailing his forecast for Tesla (TSLA 2.28%) stock. At the center of his analysis is Tesla's autonomous vehicle (AV) operation, known as Robotaxi.
Let's dive into Rosner's model and assess how transformative Robotaxi could become for Tesla in the long run. Is now the time to pour into Tesla stock before its artificial intelligence (AI) vision comes to light?
NASDAQ: TSLA
Key Data Points
How Tesla Robotaxi could become a $250 billion business
The headline figure in Rosner's report is that Robotaxi could reach $250 billion in revenue by the middle of the next decade. Let's dig into how the analyst derived such an enormous sum:
- Rosner estimates that by 2035 the ride-hailing market will be split 30% from autonomous vehicles and 70% human drivers.
- Of this addressable market, Tesla is expected to capture 50% of robotaxis on the road.
- Assuming a price of $1 per mile, Rosner suggests that Tesla's total robotaxi opportunity carries an equity value worth $2.75 trillion.
While the math implies Tesla could be on the cusp of generating hundreds of billions of dollars in new revenue from Robotaxi over the next decade, smart investors understand there are some risks associated with Rosner's forecast.
Image source: Getty Images.
What risks come with Tesla Robotaxi?
I see a few risks that come with Rosner's robotaxi analysis.
First, financial models are highly sensitive and primarily driven by assumptions. Currently, most vehicles on the road are combustion engine cars. While many auto manufacturers are exploring self-driving vehicles, the technology is yet to scale in a meaningful way. On top of that, even if autonomous platforms become commercialized, it's not yet known how quickly consumers would adopt these services.
This is all to say that the market size for autonomous vehicles is very much a "best guess" at this point. If the market and the splits wind up being smaller than Rosner's model suggests, Tesla's opportunity could shrink consierably.
Second, developing Robotaxi costs Tesla billions of dollars across research and development (R&D) and capital expenditures (capex). This enormous capital outlay will continue to put pressure on the company's gross margins and free cash flow until Robotaxi scales -- should that ever come to fruition.
Lastly, Tesla's valuation suggests that at least some of the optimism around the company's AI ambitions is already priced into the stock.
TSLA PE Ratio (Forward) data by YCharts.
The fact of the matter is that a forward price-to-earnings (P/E) multiple of 200 is rich for any type of business -- let alone a company whose main source of sales -- electric vehicles (EVs) -- is in decline, and little-to-no measurable traction has been made in Robotaxi yet.
For now, Tesla is continuing to slow-roll Robotaxi as it works closely with regulatory authorities. All the while, Alphabet's Waymo is already completing rides and generating revenue in several cities across the country.
This isn't to say that Robotaxi won't be transformative for Tesla. In the long run, autonomous vehicles could very well be a new source of sales and profits for the company.
However, despite the enormous potential of Robotaxi, I think a more realistic scenario is for Tesla stock to pull back before it soars to new highs. Until the company proves that Robotaxi is moving the needle financially, it will remain a capital-intensive, money-losing headwind weighing on Tesla's AI vision.
