TSLA Stock: Is Google Waymo Bad News for Tesla?

Google StockCould Google Waymo Hurt Tesla Stock?

When it comes to self-driving technology, Alphabet Inc (NASDAQ:GOOG), aka Google, is cited as the undisputed leader.

Yet, we must credit Tesla Inc (NASDAQ:TSLA) for bringing this technology to the mainstream auto industry before Google. The reality is that the two companies are now neck-and-neck in the race. But holders of Tesla stock must be fairly cautioned that Google’s new nitrous oxide kit (read: Lyft partnership) could give it a boost past Tesla, and likely hurt TSLA stock.

To give you an idea why this matters, Tesla’s self-driving software, “Autopilot,” is a high-margin product in terms of revenue (more on this later). What this simply means is that Tesla spends little on the software and sells it for a high price. Thus, Tesla gets to keep the huge difference as profits.

But competition is going to cut into these profits, and there’s no bigger competition out there than Google’s self-driving company—Waymo.

It’s true that Tesla’s Autopilot has logged in more miles on the road than any self-driving software out there. But it is also bitterly true that Google’s Waymo has achieved the same feat absolutely autonomously!

Waymo’s driverless cars set a new record earlier this year of having driven completely driverless for three million miles! In contrast, Tesla’s Autopilot still remains a semi-autonomous system, although the company is working on perfecting full autonomy. (Source: “Waymo’s self-driving cars are racking up miles faster than ever,The Verge, May 10, 2017.)

What Autopilot Competition Means for TESLA Stock

Coming back to Autopilot revenue, Tesla’s gross margins on this self-driving system are roughly estimated to be in excess of 90%. Yes, more than 90% of the system’s sale price is straight-up profit for Tesla. Contrast this with Tesla’s overall automotive gross margins, which stood at a little over 27% in the latest quarter.

Now, Tesla sells two types of self-driving systems. Here’s a quick look at them.

  1. The “Enhanced Autopilot” system, with limited self-driving capabilities, sells for $5,000.
  2. The “Full Self-Driving Capability,” offering complete autonomy, can be added for an additional $3,000.

So the complete package can cost buyers, who opt for it, $8,000.

Let’s say we stay conservative in our estimates and take the basic package of Enhanced Autopilot. With roughly 90% gross margins, the company is taking home a solid $4,500 in gross profit on each sale!

Even if it manages to sell roughly one-third of its cars with that feature (of the latest quarter deliveries of 25,000 cars, for example), the company could easily be making over $37.0 million in gross profits from its self-driving system alone.

That number, by the way, closely matches the number that Tesla put out in its latest quarter results. Tesla reported to have made a good $35.0 million in gross profits from the Enhanced Autopilot system in the first quarter of 2017. (Source: “Tesla First Quarter 2017 Update,” Tesla Inc, May 3, 2017.)

With that number in mind, add competition to the picture. It’s easy to guess that competition will hurt Tesla’s margins, and ultimately its profits—or, for that matter, losses. In black and white, this obviously sounds like bad news for TSLA stock, but the story doesn’t end here.

Why Waymo-Lyft Partnership Is Bad News for Musk’s Master Plan

Now, Google’s Waymo has just announced a new partnership with Uber Technologies, Inc.’s biggest competitor, Lyft, to make ride-sharing fully autonomous. It’s easy to predict that this will be hurting Uber.

But you may ask now why this is bad news for Tesla. To understand that, let’s revisit Tesla Chief Elon Musk’s Master Plan, Part Deux.

The second installment of Musk’s master plan includes four key goals. Two of these goals on the list are relevant here. (Source: “Master Plan, Part Deux,” Tesla Inc, July 20, 2016.)

  1. Develop self-driving capability 10-times safer than manual driving.
  2. Create a Tesla ride-sharing network so Tesla owners can make money off their cars.

Does it ring a bell yet?

Musk wants to make Tesla cars fully autonomous. That way, Tesla owners can let their cars go out and make money for them, when they are not using them. Musk believes that this source of income from ride-sharing will help Tesla owners to partly fund their purchases of Tesla’s premium cars. In other words, the incentive will help drive in more buyers for Tesla cars in the future.

But with the Waymo-Lyft ride-sharing service already making it to the mainstream way before Tesla, Google will get the first-mover advantage. In other words, Musk’s plan could be in jeopardy. With the company already losing money, and competition pushing profitability away, TSLA stock might be left on the line.

Bottom Line on TSLA Stock

My returning readers must already know that I’m a Tesla enthusiast. This makes it incredibly difficult for me to make an anti-Tesla pitch. But, in my line of work, neutrality is both an ethical and professional requirement.

I’ll reiterate that Tesla is still early in its journey up a high growth trajectory and, thus, has a lot of room to keep growing in the coming years. Musk’s first master plan has been successful and the second master plan is nearly halfway achieved.

Yet, competition will continue to keep the company on its toes. Current and prospective investors of Tesla stock must keep an eye out for competitors that may pose grave threats. Google might be one of them.