Tesla Inc. (TSLA, Financial) has been selling its full self-driving (FSD) technology to customers since 2016. The electric vehicle maker has long promised that FSD, an extension of its enhanced autopilot driver-assist system, would eventually achieve full autonomy, i.e., the ability to drive itself without any human intervention, or even the presence of a human in the vehicle. At Tesla’s Autonomy Investor Day event in April 2019, CEO Elon Musk promised that Tesla vehicles would soon be driving themselves, able to function as autonomous robotaxis capable of delivering their owners considerable recurring passive income. Here is what Musk said at the time:
“The fundamental message that consumers should be taking today is that it’s financially insane to buy anything other than a Tesla. It would be like owning a horse in three years…If you buy a car that does not have the hardware for full self-driving, it is like buying a horse. And the only car that has the hardware for full self-driving is a Tesla.”
With the three-year anniversary of Autonomy Day mere months away, a growing number of people are asking: Where are all the Tesla robotaxis? The answer to that question could have profound consequences for Tesla’s future.
Still not ready for prime time
While Tesla has long sought to portray FSD as being on the cusp of true autonomy, the reality is quite different. The technology has undoubtedly shown signs of gradual improvement, but it still falls far short of the requirements of Level 5 Autonomy, the highest degree of autonomous capability as defined by generally accepted industry standards.
Making matters worse, a growing number of crashes and other road safety incidents involving FSD have brought regulators to Tesla’s door. The latest such incident occurred on Feb. 4, when the National Highway Traffic Safety Administration ordered the recall of 362,758 Tesla vehicles due to safety issues with FSD. While Tesla has said that it would be able to correct the problem via an over-the-air update, it stands as yet another illustration of the gulf between the promises of FSD and the functional reality. Some investors are no longer willing to give Musk the benefit of the doubt. On Feb. 27, a group of investors sued Musk and Tesla, alleging they were misled by false claims regarding FSD’s safety profile.
Despite Musk’s repeated promises that Tesla is mere months from success, hope has begun to fade, even among the company’s most ardent boosters. The recent rollout of the latest iteration of FSD hardware, dubbed Hardware 4, has not helped matters. The new hardware system is not compatible with previous Tesla models; in other words, anyone who bought FSD before 2023 will not be able to upgrade to the latest hardware system.
Many existing Tesla owners have already started complaining. Should they seek refunds for their FSD purchases, Tesla could find itself in hot water. Should owners pursue the matter in court, its liability could be substantial.
Estimating the damages
A wide swathe of analysts are in agreement that the potential legal liability facing Tesla could be immense. Just how much Tesla could owe, however, remains a matter of active debate. Depending on the scenario, Tesla could be on the hook for as little as few billion dollars, or as much as a few hundred billion dollars. Here is one assessment of the range of potential liability, courtesy of hedge fund manager Brad Munchen on Feb. 22:
“A full refund of all Enhanced Autopilot and FSD packages sold since Q4 2016 would amount to over $5 billion…or 40% of 2022’s net profit and 11% of equity. A full refund of the 362,578 cars with these options sold would cost Tesla over $19 billion, or 1.4x Tesla’s 2022 net profit and 43% of its equity.”
There is obviously a big difference between $4 billion and $19 billion, but this wide range goes to show just how uncertain the situation is for Tesla. Munchen’s range estimate is actually quite narrow when compared to those of other analysts. Bill Maurer, for example, on Feb. 21 highlighted a possible future in which Tesla ends up owing far more than even Munchen’s worst-case scenario would suggest:
“At an average cost of $10,000 for FSD, that gets you to around $4 billion when you consider how many customers have reportedly paid for the package so far. However…a customer could suggest that they bought their Tesla because of FSD's potential, but are waiting to buy the FSD package until it's completely ready for prime time. By the end of Q1, there could be close to 4 million vehicles that have hardware version 3 or earlier. A lawsuit looking for Tesla to repay the consumer for the entire vehicle's cost based on not delivering FSD, using an average sales price of $60,000, would result in a liability of $240 billion dollars!”
While the probability of Tesla facing as punitive a judgment as that described in Maurer’s worst-case scenario seems quite low at present, it is certainly not zero.
My take
In my assessment, Musk’s emphatic statements about the value of FSD and his aggressive sales pitches based on Tesla vehicles’ near-term ability to function as true robotaxis appear sufficient to ensure there is at least a case to be made for the more extreme view of Tesla’s FSD liability. However, it would not take such a punitive judgment to deliver a grievous injury to the company’s finances. A $6 billion judgement alone would suffice to wipe out nearly half of Tesla’s profits for the entirety of 2022.
Moreover, the latest controversy may further reduce FSD adoption rates by Tesla buyers. The FSD take rate has been in decline for some time, but this could well accelerate in the wake of the realization that anyone who paid for FSD before this year is unlikely to ever enjoy it. That could be a problem for Tesla, which has enjoyed significant margin boosts thanks to FSD sales. In 2022, FSD sales accounted for about 6% of Tesla’s automotive gross profit. Losing that boost would be a blow, especially as Tesla continues to cut prices across its lineup in order to move metal.
At present, Tesla still enjoys a significant valuation premium to automotive industry peers. Yet that premium is based in no small part on its FSD promises and reported industry-beating margins. Losing either of these perceived advantages could call Tesla’s premium valuation into question, in my opinion. Losing both could be far worse.
