Financial Impact of Tesla’s Future Self-Driving Network

Introduction: Tesla has the potential to disrupt the auto and energy markets and I have been intrigued by what the future holds if they deliver on their commitments. I’ve written a series of posts to help me think through how this will all play out. I welcome feedback and counter arguments to help me sharpen my thinking. I do not work in the automotive or energy markets nor do I know anyone at Tesla, so this is all written as observations and conclusions from afar.

This is the first installment in my series of posts about Tesla. The others will discuss why I voted for the SolarCity/Tesla merger, ownership models in a self-driving world, how self-driving networks will transition from inception to saturation, and what to expect in the competitive landscape.

Tesla’s financial situation has more volatility and risk than most companies and self-driving capabilities will play a huge role in Tesla’s financial viability in the next few years. For that reason, I discuss financials first as the foundation of this series.

Through most of their histories, Tesla and SolarCity have been cash burning companies and tapped into financial markets regularly to obtain sufficient liquidity. As long as Tesla needs more outside capital to grow, they are heavily exposed to systemic risk in the financial markets. If a global slowdown or recession occurs, Tesla may face an existential threat if they are unable to tap into the financial markets.

The surest way to mitigate this financial risk is to deliver a self-driving capability and network of cars to rent. A self-driving network would completely change the financial return dynamics of Tesla, making them more similar to software companies than manufacturers. Gross margins would go way up due to the recurring revenue with very low variable cost from self-driving cars. Further, if Tesla is able to deliver anywhere close to its production targets, its service-related revenue from self-driving car network should surpass its revenue from auto sales by 2022.

To illustrate, I put together a bunch of key assumptions that impact Tesla’s self-driving network financials:

Then looked to see what Tesla’s revenue and gross margins look like in the base case:

Then I analyzed how sensitive Tesla’s cumulative revenue between 2017 and 2022 is to the key variables:

Then I looked at how sensitive Tesla’s margin from cumulative revenue between 2017 and 2022 is to the key variables:

Check out my Google Sheet with assumptions and outputs here.

Looking at the data, it is clear that self-driving cars can have a huge financial impact on the company. And because financial risk is one of its biggest existential threats, Tesla’s speed to market with its self-driving capability is incredibly important and partly helps explain their aggressive approach. Speed to market is more important than production ramp up timing, rates charged by Tesla for the service, and the percent of the Tesla Network revenue that is distributed to owners.

These assertions come with a lot of caveats. First, a lot of the conclusions drawn here are based on taking a lot of what Tesla has shared with us at face value (ex. they can deliver Level 4/5 self-driving without LIDAR). As evidenced by their track record, it’s a huge risk to depend on Tesla meeting deadlines, and even more so considering the extra importance of speed to market to deliver financial returns. Also, as competitors come to the market with their own services and networks, there will eventually be pressure on Tesla to reduce their network pricing.

There are a lot of assumptions baked into these financial figures and a wide range of outcomes that are possible. There’s close to a 100% chance that I’ll be wrong about all of the financial assumptions in this post. However, the exact numbers and assumptions are not as important as the general direction and big picture conclusions that they support.