Why Tesla's Robotaxi Lead is a Game-Changer
08:24 Share

Hi, it's Dave. So there's a thought going around by some investors where they use this line of reasoning to justify not adding Robotaxi into a valuation model for Tesla. The idea is that once Tesla solves for unsupervised FSD, it's just a matter of two or three years before other companies will also solve it and compete in the same space.

Thus, the argument goes, it's not that special for Tesla to be first because it's not unique and it will be copied. Therefore, some people conclude that we shouldn't add Robotaxi into a Tesla valuation model right now. I think fundamentally the problem with this argument is that it's a shallow take on what I think our winner takes all dynamics in the ride-hailing market.

Let's think about the current ride-hailing market of Uber and Lyft. Right now, their biggest selling point is their large supply of drivers, which allows them to blanket most urban areas and provide a ride at a reasonable amount of time for an affordable price.

For a newcomer to enter that space is extremely difficult because they simply don't have the supply of drivers to match Uber and Lyft, making their service vastly inferior. Second, because Uber and Lyft have a big supply in almost every major city, they're able to use that large market to offer rides at a decently affordable price and still make money.

But if you're a newcomer without many cars and you try to offer that same price at Uber and Lyft, you're going to lose money because you're not getting as many rides per driver. That's why Uber and Lyft went through a mad rush to take over markets and reach market domination in the early years. They were extremely focused trying to saturate different cities to get that network effect and become the predominant ride-hailing network.

This is a powerful concept where certain products have extremely strong network effects that determine and impact the value of their product. Riot Hailing is an example. Another one is Airbnb. Because Airbnb has the most properties, they're able to attract the most people and hosts, making it a better product overall. And it's difficult to unseat Airbnb unless you can attract more hosts and properties than them.

Regarding robotaxis, it's unclear exactly how many years Tesla is ahead of other companies in terms of generalized autonomous driving. Some specialized autonomous driving companies like Waymo are slowly rolling out their networks, but their rollouts are taking an extremely long time because their hardware is expensive and their approach is not a generalized solution that can work across many types of environments very quickly.

In my opinion, Tesla probably has a 4 or 5 year lead in generalized autonomous driving. Now that will change year to year depending on what companies are involved. But right now we're not seeing a very strong second place competitor right at Tesla's heels. Now if Tesla solves for unsupervised FSD within the next 2 or 3 years, they're going to be first to market to offer a truly generalized robotaxi service across hundreds if not thousands of cities worldwide.

Tesla is in a unique position to quickly establish a formidable ride-hailing service with perhaps even millions of available cars across thousands of cities. And the unique thing about this Tesla Robotaxi network is that they will be able to undercut the pricing of Uber and Lyft significantly because there's no human involved in driving. In the beginning, Tesla will be able to charge prices near or comparable to Uber and Lyft as long as they have the density of supply in their markets. So let's say

Los Angeles as an example. If Tesla has, let's say, more cars than Uber and Lyft in LA, then Tesla will be able to offer a better service because a Tesla Robotaxi can get to a person quicker than, let's say, Uber and Lyft. And further, Tesla's Robotaxi platform will offer a cheaper price because a human is not involved. Within a few to several years, there's no way, in my opinion, Uber and Lyft can compete against that.

Tesla would be in a position of having this density of supply, right, of vehicles and a cost structure that doesn't include, right, a human driver. And that's how they could undercut, right, Uber and Lyft significantly. And I just don't see Uber and Lyft being able to compete.

And as long as Tesla's robotaxi platform is significantly safer than a human driver, I think we're going to see fast and huge adoption across thousands of cities worldwide. Now, let's say you're a competitor to Tesla wanting to develop autonomous driving software. And let's say you're four years or so behind Tesla.

So four years after Tesla releases their robotaxi network, you also start to release your robotaxi network. The problem is that Tesla already has a density of supply with millions of vehicles in their fleet. They've saturated and covered thousands of cities across the world, and they have that demand that their service has created. They've also paid for all the sunk costs in terms of trying to create that network and platform.

And in the end, Tesla offers a better product with their cars getting to the end consumer faster and they're able to charge a cheaper price because they have a much larger supply and lower cost per vehicle structure in their network. As a newcomer to the market, you're gonna have an extremely difficult time finding a way to carve out your space.

Can you offer more cars than the Tesla network? Probably not. Maybe you can try to target one city and blanket that city, but Tesla has probably already blanketed that city. So maybe you could try to undercut Tesla's price, but then you're basically subsidizing your growth and losing money to try to get a foothold in one city where Tesla already has a dense supply of vehicles offering crazy affordable pricing for ride hailing.

Tons of people would have Tesla's ride-hailing app, but if you're a newcomer to the market trying to blanket one city, who's going to download your app? Anyways, I think it's extremely challenging to get even one foothold in a city after Tesla has reached saturation, let alone trying to get two or even a hundred cities. I think you're going to have to pay a fortune to try to compete against Tesla. And even that, your chances of success might be slim.

For Tesla, the benefit for being first to market with Robotaxi is that they don't need to compete against an existing unsupervised Robotaxi company, and they don't need to try to undercut their price. For Tesla, they only need to compete against a human-driven ride-hailing network such as Uber and Lyft. In order to beat Uber and Lyft, Tesla just needs to do two things. One, they need more density of vehicles in an area, and number two, they need to undercut the price.

Undercutting the price of Uber and Lyft is easy for a robotaxi. And all Tesla needs to do is really reach that density of fleet in different urban areas. Of course, all of this is dependent that Tesla's robotaxi is significantly safer than a human driver.

Now all in all, I think the lead Tesla has regarding Robotaxi is underappreciated. It allows Tesla to have a crazy advantage in establishing the first ever Robotaxi platform and it puts every other company who tries to establish one at a later date at an extreme disadvantage. It's going to be extremely difficult for a company to try to enter and take a market that Tesla has already won with millions of cars around the world servicing thousands of cities.

So why don't more analysts include Tesla's Robotaxi platform in their valuation model? I think it comes down to the reality that most analysts are not real students of technology and innovation. Most analysts covering Tesla are auto analysts. They're looking at numbers of an auto industry with revenues and margins and products that haven't changed for decades.

and they're not really in the place to assess how likely Tesla's Robotaxi platform is to succeed, when it's going to roll out, whether it's a winner-takes-most market, or analyze the network effects of a Robotaxi market. That's why I think most analysts covering Tesla choose to adopt a wait-and-see approach, assessing Tesla regarding their current business, but not putting any valuation on the Robotaxi platform.

It's an interesting phenomenon and it provides an opportunity for those who perhaps have a first-hand seat in test driving Tesla's FSD software and tracking and monitoring it and then also having a sense of how far Tesla is in the lead and what their robot taxi network could look like. Anyways, a lot of interesting things going on with autonomous driving. The next few years are going to be super interesting. Hope this has been helpful. We'll see you guys in my next video. Thanks.