Could a Car Deliver an 81% Gain?

Dear Reader,

Elon Musk claims autonomous driving “will be the biggest asset value increase in history.”

Specifically, he thinks that once Teslas are capable of driving themselves, they’ll be worth “several times more” than what they originally sold for.

It’s a bold claim.

And it’s worth investigating in light of Tesla’s recent breakthrough with full self-driving (FSD).

Last week, I covered Elon’s demo of Tesla’s latest FSD system.

For those who missed it, here’s the important part:

Previous versions of FSD were a combination of human-written code and AI.

A developer would write lines of code that told the car what to do when it identified a stop sign, for example.

But this version of FSD, V12, is different. There isn’t a single line of human-written code telling the car what a stop sign means… to avoid hitting pedestrians… or what to do around a construction zone.

Instead, powerful AI models were trained from the ground up using data from millions of miles driven in Teslas.

This AI-only version of FSD appears to be a major improvement over previous versions.

I could see Tesla reaching Level 4 or 5 self-driving within the next 12 to 18 months.

If it reaches Level 5, a Tesla would be able to drive people around without anyone sitting in the driver’s seat.

That would free the Tesla up to act as an autonomous taxi. It could be out and about giving rides, earning money when the owners aren’t using it.

If that happens, Elon’s claims could be tested by the market soon.

But I don’t want to wait that long. So I ran the numbers myself. Here’s what I found.

Use Cases

I think there will be three types of FSD users:

• Private use – People who don’t want to be bothered with driving. They also don’t want to lend their car out to strangers.

• Full taxi – People who want to make money lending out Teslas to shuttle others around.

• Mixed use – Some combination of the two… Maybe a white-collar worker who doesn’t want the headache of traffic and is willing to let his Tesla drive others around while he works.

With these scenarios in mind, I crunched the numbers to find out just how profitable a Level 5 autonomous Tesla could be.

The following chart shows the return on the initial investment after one year.

We made these conclusions based on the regular depreciation of vehicles and the average revenue generated from current ride-hailing services like Uber and Lyft.

Not surprisingly, the private user is sitting at a substantial loss in year one. While a Tesla under normal use only depreciates about 5% per year, the $15,000 for FSD is a sunk cost. That’s because Tesla doesn’t let you sell your FSD along with the car. And only a subset of owners are allowed to transfer FSD to a new vehicle.

Mixed use vehicles offset this cost within the first year. In this scenario, I’m assuming a white-collar worker who lets his Tesla drive others around for seven hours a day five days a week.

His Tesla could make about $29,000 per year. After maintenance, fuel costs, and depreciation, he’s only in the red $4,850 in the first year.

And assuming the owner keeps this pace, he could start seeing a profit on his “investment” after three years. If he sold his Tesla at that point with roughly 172,000 miles, he’d have made a profit of $29,830.

Things get more interesting when we look at the dedicated taxi. I’m assuming a Tesla that’s based in a major metro area with superchargers available and near-constant demand. A Tesla like that could work 22 hours a day nearly every day of the year.

In all, it would make about $102,000 in a year before costs. It would also rack up over 200,000 miles – depreciating the vehicle by an estimated 75%.

Still, if we assume the owner flips his car once a year, he’s making $45,000 off of a roughly $55,000 upfront investment in one year. That’s an 81% return on investment.

Here’s how it stacks up against other asset classes for a one-year return.

Of course, a deal like that is too good to stay that way. That’s why Elon claims Teslas would become “several times more valuable.”

Although, my math says that’s an overstatement.

If the price of a Model 3 with FSD increased 72% from $55,000 to $95,000, the one-year return would drop to just $5,290.

That’s a 5.5% return. Much more in line with traditional asset classes.

Not surprisingly, this would also make mixed and private use far less appealing.

I fully expect Tesla to find clever ways around this.

For instance, it could charge different rates for FSD depending on use. Private users of FSD may pay a much lower rate than those who will use it for full commercial use.

After all, Tesla already has a clause that states if the vehicle enables autonomous driving, you can’t use it with other ride-sharing services like Uber or Lyft.

That gives Tesla another option of keeping FSD cheaper but taking a cut from every mile driven.

What’s clear is that autonomous driving will make Teslas more valuable. But it remains to be seen just how valuable it will become.

But considering that all vehicles are depreciating assets, the idea that one could actually be a passive income producer is intriguing.

Beyond Elon Musk, we’re going to see other CEOs come out and tout the benefits of AI. Some will make radical claims. Part of my mission here is to dig into the economics of AI and determine which of these claims are true… and which are hyperbole.

As always, I’ll share my findings with you right here.

Regards,

Colin Tedards
Editor, The Bleeding Edge