Tesla Breakthrough: Going Full Auto

Jon Markman

Tesla ((TSLA) -Get Report) is rolling out a full self-driving mode this week, and although software bugs are to be expected, the feature should be the most important automotive development in a generation.

Investors might have missed the self-driving reveal. It was unceremoniously tweeted October 20. That happened to be the night before the company reported third quarter earnings.

Self-driving software is more important than earnings, by a long shot.

Autonomy is the Holy Grail for the automotive sector. The idea of cars and trucks zipping down the highway guided only by smart software and sensors has been a pipedream since the early 1960s. Then Americans were obsessed with the moon and the space age. Somehow, the tech to bring handsfree earthly navigation never made it off the launch pad.

There is a good reason: getting it right is hard work. Driving a vehicle safely is enormously complicated for a computer system. We take for granted how quickly our eyes and emotions distinguish between the lethality of bugs and stones hurtling toward our windshields. Sensors and software don’t process information nearly as efficiently.

Elon Musk, Tesla’s chief executive, has been promising self-driving vehicles since 2016. He was so confident that he pledged to equip every new Tesla with all of the necessary sensors and computer processing equipment for FSD. When the software was ready, a corporate blog post promised, it would simply be a matter of flipping the switch to handsfree driving.

His optimism was admirable but four years later Tesla owners are still waiting.

In fairness, there has been progress. An over-the-air software update in May brought unassisted lane changes. A few weeks later Musk confirmed that its vehicles were getting the ability to automatically navigate green lights. Both of these advances were one step closer to autonomy.

The beta update last week incorporates lane changes, green light navigation and everything else that the company has been feverishly working on since 2016. Judging by the reaction of owners in the limited release beta, Tesla is on the right track.

Numerous beta testers have shown the can completely self-navigate through crowded city streets and winding country roads. Passengers are able to enter their destination, then sit back and watch as the car does all of the driving.

The strategy is a big part of Tesla’s larger AV plan. Its large fleet of willing beta testers is the closest thing to Apple ((AAPL) -Get Report) rolling out an operating system upgrade, then waiting for users to uncover software bugs. It’s the most efficient way to develop code.

Tesla has the added advantage of being able to see those bugs as they are occurring in real-time. Every vehicle is always on and connected to the company’s servers, uploading terabytes of useable data. Network learning means that when one vehicle learns how to navigate a winding road in Malibu, every Autopilot enabled vehicle gets that information.

Tesla project managers noted in April that the fleet size reached 1 million vehicles. The YouTube presentation highlighted 3 billion miles driven under Autopilot, including 200,000 automated lane changes. These numbers are certain to surge as FSD software is seeded with additional beta testers.

Automation is a clear Tesla advantage, and it is resonating with owners. However, the strategy also carries considerable risks. While updated iPhones may suffer annoying battery drain or lost data, a software glitch for a FSD Tesla might result in death.

Despite this, the potential upside for shareholders is enormous.

Car and Driver reported the Tesla FSD software package will eventually get a $2,000 price bump. To be honest, that figure might be even more going forward, and the increase is pure profit margin. Also, because older Teslas are equipped with the necessary hardware, their aftermarket value should jump, too. It’s hard to say how much AV capabilities might be worth, but it’s probably substantial.

Shares are currently mired in the $400 range. The market capitalization has swollen to $396 billion, more than the combined value of Ford ((F) -Get Report), General Motors ((GM) -Get Report), Fiat Chrysler ((FCAU) -Get Report) and Honda ((HMC) -Get Report). Tesla stock is not cheap.

Still, investors are underestimating the impact of FSD software for the sector. Buy Tesla on pullbacks toward $350.

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Veteran tech columnist Jon Markman is the publisher of Strategic Advantage, a popular daily newsletter about the great digital transformation of business, entertainment and society -- and how to invest in it.  Click here for a free two-week trial.

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