Tesla Is Winning the Race for Autonomous Cars
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Tesla Is Winning the Race for Autonomous Cars

The race to self-driving cars is heating up, and for the first time in years, many believe Tesla, Inc. (Nasdaq: TSLA) may not get there first.

Part of the reason for that is Honda Motor Co., Ltd. (NYSE: HMC) announced last week that its new Legend, a Japanese-only sedan, will become the first production vehicle to ever achieve level 3 automation certification.

In the automotive world, this was a complete shocker. But investors should still bet on Tesla.

The Honda news comes with important caveats. Level 3 automation is not full self-driving. The Legend’s software, called Traffic Jam Pilot, can control acceleration, braking and steering under certain circumstances. In the official promotional video, the combination of these capabilities makes it look like the vehicle is autonomous. Handsfree lane changes and a driver glancing over at what appears to be a movie playing on the center video screen is a nice trick.

The press release tells another story.

The driver must remain alert at all times, ready to takeover. Also, the vehicle operational software depends on 3D high-definition maps, a global navigation satellite system and input from exterior-mounted sensors. Even then, the Legend can’t make unassisted turns against traffic or navigate intersections.

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Tesla’s Autopilot suffers from none of these limitations. The software is capable now of full self-driving. FSD is powered by state-of-the-art artificial intelligence. These algorithms can usually make sense of traffic signs, road markings and even pedestrians behaving strangely. Although the software is still in limited beta release, videos posted on YouTube prove it’s the real deal.

This is an opportunity for investors. Despite the strength of the stock since 2012, Telsa continues to attract a large bearish community. The gist of the argument against the electric-vehicle maker is overpromise. Detractors say Tesla is a decade away from actually delivering true sell-driving vehicles.

The bears are wrong and will likely be squeezed again.

Jim Keller is a microchip designer best known for his early work helping Apple, Inc. (Nasdaq: AAPL) build its A4 and A5 system on chip architectures. After a stint with Advanced Micro Devices, Inc. (Nasdaq: AMD), Keller joined Tesla in 2016 as vice president of Autopilot hardware.

In the past, Keller said the team wondered if the hardware would ultimately be powerful enough to run the AI that informs FSD. Now, this no longer seems to be in doubt, mainly thanks to new algorithms capable of unsupervised learning. Keller explained the process on an informative podcast with Lex Fridman last week.

The bottom line: Tesla can deliver FSD vehicles with existing hardware … and soon.

And that brings us back to the current stock market environment and investor expectations.

The Honda news last week is the perfect foil. There is a growing perception that competitors in the automotive world are catching up to Tesla.

This is simply untrue. Tesla has a huge lead. The company has both the most advanced software/hardware systems and the biggest fleet of test vehicles.

Every Tesla comes with an always-on connection that sends data back to Tesla servers 24/7. Willing or not, Tesla owners with Autopilot are building the company’s archive of learning data.

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To date, some 30 billion miles have been driven using the software. This treasure trove of digital information is now being unleashed to new FSD algorithms trained to make decisions without human input. It’s an evolution of the software development process that isn’t being matched anywhere in the automotive world.

When FSD is released to more users in the coming days, it should cause panic in the bear community and a flurry of new upgrades from Wall Street analysts.

Tesla shares trade at 126 times forward earnings and 21 times sales. These metrics are gaudy when compared to General Motors Co. (NYSE: GM) at 9.5 times and 0.7 times, respectively. But keep in mind that these companies are not the same. One produces an electric robot with wheels, the other makes cars and trucks moving to electric propulsion.


 

There is a short-term trade available in Tesla that savvy investors should consider. The stock could push back toward its recent high.

All the best,

Jon D. Markman

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