Key Points
Tesla (NASDAQ: TSLA) is taking a different approach to its robotaxi business than almost every other company. Not only does it eschew expensive hardware like LiDAR (light detecting and ranging) to enable self-driving in its vehicles, but it’s also a fully vertically integrated business. It handles everything from manufacturing down to the consumer experience.
Consumers use a Tesla app to call a Tesla car. That poses a significant threat to Uber Technologies (NYSE: UBER), the current leading ride-sharing app.
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Shares of Uber have fallen about 30% since the end of the third quarter last year, making a big dent in one of Bill Ackman‘s largest investments. But Ackman believes the market is still underappreciating Uber and overblowing Tesla’s potential with robotaxis. Here’s why.
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Does Tesla have an advantage in robotaxis?
Tesla started its robotaxi pilot in Austin, Texas, just over a year ago. At the time, Chief Executive Officer Elon Musk said, “I think we will probably have autonomous ride-hailing in probably half the population of the U.S. by the end of the year.”
The reasons Musk was so optimistic about Tesla’s ability to scale its robotaxi so quickly are twofold. First, Tesla’s self-driving technology doesn’t rely on advanced sensors. Instead, it collects data from every Tesla vehicle in operation to feed into its AI algorithms, providing a self-driving solution based mostly on cameras and radar. Management’s also confident its solution won’t require extensive mapping for each city.
Second, since its solution doesn’t require any specialized equipment, Tesla can quickly manufacture new robotaxis and enable existing Tesla owners to put their vehicles into service through a revenue-sharing model. As a result, it can rapidly expand its fleet.
A year later, it’s clear scaling isn’t as easy as management thought. It’s driven a total of 380,000 unsupervised miles in six cities in two states. While management notes it’s growing at a double-digit percentage pace per week, it’s still way behind the market leader, Alphabet‘s Waymo. Waymo vehicles travel more than 4 million miles per week and have completed 220 million autonomous miles total.
Tesla has kept the number of vehicles in its fleet very low. When asked why it doesn’t scale to hundreds of vehicles in a given city, management said it’s intentional, keeping its fleet small and testing its service across multiple cities to prove its self-driving service works everywhere. Musk also noted that it still needs to accumulate miles with its new Cybercab chassis before it can confidently scale the vehicle.
But this strategy could ultimately be the reason Uber proves to be a better investment than Tesla.
The simple reason Uber wins
In a recent interview, Ackman explained what matters most to consumers when using a service like Tesla’s robotaxi or Uber: “You want the lowest-cost car that’s going to get you from place A to B in the shortest period of time.”
It’s not any more complicated than that. Uber is uniquely positioned to perform best based on those criteria. That’s because of its leading position as an aggregator of supply and demand.
So far, Tesla’s robotaxi service features extremely long wait times and limited availability. Even Waymo’s wait times are 80% longer on average than Uber’s.
Elon Musk brushed off the idea of using a third party for demand aggregation during Tesla’s second-quarterearnings call “The economics will be so compelling that I think we will really have a lot more desire to use the service than I think demand will outstrip our ability to service the demand,” he said. However, demand without sufficient supply leads to a poor user experience, which naturally drives customers to competitors.
Uber is the only company that can match supply and demand, and it has the scale to do so. That’s why it’s positioning itself as a partner to autonomous-vehicle companies looking to maximize their capital efficiency. They can gradually add cars to the Uber platform and let the market absorb the supply. Meanwhile, Uber’s broad network of drivers (both human and AI) can provide the fastest trip at the lowest price.
As the economics of ride-sharing improve with more autonomous vehicles on the roads, Uber can maintain its margins while allowing autonomous-vehicle companies to share the cost savings with customers. Ultimately, that should expand the total market and push Uber’s earnings significantly higher.
Nonetheless, the market continues to value Tesla higher than Uber, given the former’s potential for its robotaxi service. Investors are paying 156 times earnings expectations for Tesla right now. In other words, investors think the current auto manufacturing business is just a fraction of Tesla’s future business. Meanwhile, you can pay less than 20 times earnings expectations for Uber, which looks underpriced compared to its potential as a leading platform in ride-hailing for years to come.
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Adam Levy has positions in Alphabet and Uber Technologies. The Motley Fool has positions in and recommends Alphabet, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
