Although Tesla is immensely popular among Teslovers, and generally highly regarded by engineers and auto critics alike, the fact of the matter is the company is not selling that many vehicles a year. Yes, Elon Musk and Tesla are selling out all the high-end electric vehicles they can produce, but given that the firm only sold 11,500 units last quarter, the margins obviously need to be relatively high to make a profit.
Unfortunately, despite the very high price it charges for its top-end EVs, Tesla is actually losing close to $4000 per vehicle sold today (see analysis below). This means, of course, that ‘s there a good deal of work to be done to bring Tesla up to a profitable economy of scale.
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According to a number of analysts, Tesla’s new autonomous driving system (autopilot software) is one area where the firm can significantly boost its margins.
Very high margins on first gen autopilot software
The EV maker has begun to equip its Model S with hardware including 12 long-range ultrasonic cameras designed to sense objects within 16 feet of the car in all directions, a forward-looking camera; and high-precision digital, electric assist braking system. A Model S equipped with Tesla Version 7.0 software can take over driving functions from the driver in highway driving, permitting the vehicle to steer within a lane, change lanes with a simple turn signal, move left/right or accelerate/decelerate to avoid collisions from the front and sides, scan for parking space and alert the driver when space is available, parallel park on command, and manage the speed of the vehicle with active, traffic-aware cruise control.
Tesla proudly points out that its autopilot solution was developed in-house using the most advanced component technologies from Mobileye. Moreover, those who have spent time in a vehicle using Tesla’s autopilot feature have reportedly been very impressed with the system.
Raymond James analyst Tavis McCourt recently commented on Tesla’s autopilot solution versus the competition:
“We would note that Mobileye’s development of algorithms for autonomous driving also utilizes artificial intelligence, deep learning, and all the latest and greatest buzzwords … from what we
can tell from the article, Hotz is utilizing very similar development technology as Mobileye, but with 1/100th the number of engineers and giving Mobileye a 16-year head start. The solution also does not appear to be price-disruptive as Hotz mentions a $1,000 price point in the article. All-in costs of Mobileye single-camera solutions (including tier-1 integration) is roughly $100 today, so an eight-camera configuration for autonomous driving would likely be at or even cheaper than what Hotz appears to be proposing.”
McCourt then goes on to point out that Elon Musk’s firm’s gross profit margin on its autopilot solution could top 95%. Given that Tesla sells its autopilot solution for $3,000, that means the company could be looking at a gross profit of over $2,850 for each autopilot solution.
Tesla losing $4000 per sale today
When you do the math, the very high gross margins that Tesla will enjoy on its first-generation autopilot solution are a big deal because of what it can do for Tesla’s bottom line. Keep in mind that Tesla reported a net loss of $47 million on sales of 11,532 vehicles during the third quarter, which means the company lost close to $4,000 per vehicle.
That sweet $2,850 gross margin from Tesla’s autopilot solution would reduce the losses per vehicle by 70%. If this scenario actually comes true, the improvement in Tesla’s margins is likely to result in notable share price appreciation.