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FSD Will Have Powerful Impact on Tesla Profits

FSD Will Have Powerful Impact on Tesla Profits

While the timing of Tesla reaching full autonomy is still an unknown, with Elon Musk less vocal on the topic over the past six months, the company is moving forward with the initiative. Tesla made it official, launching the subscription option for FSD. Expanding the addressable market for FSD through monthly payments is an important step along the long-term path to increasing margins, which will strengthen the company’s operating model. Improving profitability is central for mainstream tech investors to endorse Tesla as a true tech company.

The subscription option shifts the cost of FSD from $10,000 upfront to $200 per month (or $99 for cars that already have advanced Autopilot) and will play an important role in accelerating FSD adoption. The reason is because Tesla buyers are skeptical of the value of what seems like a pricy option, as evidenced by our estimate that nearly 80% of Tesla buyers pass on FSD at the time of purchase. Since owners can subscribe month-to-month, we believe a measurable 20% of annual buyers will give the feature a try. Initially, we expect most will quickly cancel the subscription, and over time as capabilities are added, retention will build. Fast-forwarding 10 years from now, we believe full autonomy will likely be required as a standard feature for all automakers, which would render the FSD subscription a moot topic. The good news for Tesla is that between now and 2031, FSD subscriptions can move the financial needle for the company.

FSD falls short of its name today, will live up to it over time

Today FSD is far from full self-driving and falls short of its name. Over time, we believe it will deliver level 4 or 5 autonomy, thereby living up to the name. Today, there are five key features enabled, including navigate on autopilot, auto lane change, auto park, summon, and traffic light and stop sign control. In essence, FSD today works on highways and in parking lots. Tesla makes it clear when considering FSD that the enabled features require active driver supervision and that it does not make the vehicle autonomous, which begs the question of why the company has named the offering FSD. The answer is eventually the product will be fully autonomous as new features are adding, including autosteer on city streets later this year.

FSD will have a powerful impact on Tesla profits

The math around the potential of FSD is hard to believe. We believe over the next decade, booked operating profit from FSD upfront and subscriptions will increase from $600m in 2021 to $102B in 2032. This implies today that 20% of annual buyers purchase FSD upfront and 3% of the remaining eligible vehicles subscribe. As features are added over the next five years, we believe those numbers will increase to 31% and 15% respectively, climbing to 45% and 34% in ten years. That means in 2031, about 80% of Teslas on the road will have FSD. As mentioned, looking past a decade, we expect full autonomy will be a required feature to sell cars globally. In terms of operating profit, we’re modeling for operating margin to increase from 42% this year to 64% in a decade.

What does this mean for TSLA valuation?

Ultimately it’s up to Tesla investors to decide what multiple to assign to the company’s FSD profits. That said, there is room for earnings expansion. Assuming our estimates are too optimistic, and the company does a third of the FSD profits in 10 years that we’re predicting, applying a 25x multiple on those profits suggests FSD alone is worth $850B in a decade, compared to the company’s current market cap of $620B. Keep in mind that a portion of Tesla’s current valuation is already pricing in some FSD success.


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Autonomy Progress is Proving to be Slow

Autonomy Progress is Proving to be Slow

Patience is a virtue.

We recently gathered data from the nine companies leading the race to build fully autonomous systems for passenger cars. Almost all companies are finding that delivering full self-driving is slow going, more challenging than believed six months ago. Our conclusion is based on findings that despite progress, timelines for most projects continue to be pushed back.

We’re still still years away from seeing self-driving cars become mainstream. Our best guess remains unchanged, that 2025 will be the first year of public availability of level 4. Prior to that, we will likely see level 4 semi-trucks on the road. Our bottom line: passenger car autonomy will take longer than most think, and ultimately be more transformative than anyone can image.

Autonomy 101

As a baseline to frame what companies pursuing autonomy are doing, it’s important to understand the different levels of automation. The scale goes from 0-5:

SAE autonomy levels from

Advantage remains Waymo, Tesla and Apollo

In March, Honda (yes, Honda has autonomy ambitions) announced the first-ever production vehicle with level 3 autonomy, which is now available in Japan in limited numbers. It’s possible we see level 3 cars from other big car manufacturers in the coming years, such as Tesla, which has edge level 3 capabilities, now available in the form of FSD beta. Regarding level 4, the most advanced of these projects continues to be Waymo (Alphabet) and Apollo (Baidu), with Waymo being slightly ahead. Both companies have already begun self-driving taxi services limited to beta users in certain geographic regions, and both say they’re on track to expand public availability of these services late this year. Here is a look at the nine leaders and their progress to date:

Ongoing lidar vs. camera holy war

Little has changed year-to-date on the debate between the broader auto industry and their endorsement of Lidar, and Tesla’s camera approach. Most of the level 4 manufacturers continue to believe the vision stack will start with a top-mounted system of 3D sensing cameras, Lidar, radars, and 3D maps of the environments in which they can operate. Tesla continues to stand out for their refusal to use Lidar technology. We believe the industry, including Tesla, will eventually agree that autonomy will require a combination of Lidar, cameras, and digital radar. We see the breaking point for Tesla to endorse Lidar is when sensor prices decline by 50%, likely a couple years away.

Hurdles remain unchanged

The key hurdles to autonomy have remained unchanged over the past six months.

  1. Geographical boundaries. Progress for Waymo and Apollo relies heavily on further improvements in mapped environments, which means these services will take time to roll out. For example, today, Waymo only operates in a 50-square mile area in the suburbs of Phoenix, while Apollo only operates in the area surrounding the 2022 Olympic village in Beijing.
  2. Weather. An autonomous car with current technology is incapable of dealing with snow covering a sensor or ice on the road.
  3. Regulation. Regulatory standards are strict to the point that autonomous systems and cars need to be near 100% reliable before public use approval. A high, irrational bar, considering humans are far from perfect when it comes to auto safety, as evidenced by 39k people losing their lives on US roadways in 2020.


Autonomous Vehicles, Google, Tesla
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