Investors are currently in a state of excitement as news emerges that Donald Trump aims to make it simpler to get autonomous cars on the roads. This news led to a significant surge in Tesla stock, with Wall Street analysts justifying the jump by emphasizing the company's AI efforts. However, there is a crucial issue at hand - the analysts are mistaken, and autonomous cars are not the market savior they anticipate.

Unveiling the Truth About Autonomous Cars and Tesla's Valuation

Cost Savings from Removing Wheels and Pedals

When it comes to the cost savings from removing wheels and pedals from cars, it is likely to be minimal compared to the overall cost of an autonomous vehicle. Although brake master cylinders and steering columns are complex, autonomous vehicles still require braking and steering. The complex systems remain intact, with only the human controls removed to cut costs. According to Tesla's parts fiche, the entire upper steering column and wheel assembly for a Model S costs $2,853.05 at retail pricing. While this is not a negligible amount, it is not enough to outweigh the $2,400 car computer. In automotive manufacturing, controls are not the major cost factors.Another aspect to consider is that the self-driving market is smaller than most people think. The entire global passenger car market was around $3.1 trillion in 2022. Studies have shown that 86 percent of U.S. drivers want to be able to take over an autonomous car in an emergency. This means that each autonomous vehicle manufacturer is only vying for a portion of a $434 billion market if these numbers hold globally. When Tesla's master plan of allowing Robotaxi owners to share their vehicles is taken into account, which could enable a single vehicle sale to serve multiple interested buyers, the company's share of this already tiny market could become infinitesimal. Currently, no automaker holds more than an 11 percent global market share, and Tesla may be aiming for only tens of billions. This does not justify 77 percent of a trillion-dollar market capitalization.

The AV Market and Its Challenges

The autonomous vehicle market is more challenging than analysts realize. The global passenger car market is growing at a rate of 16.2 percent annually, but it would still take years for the entire market size to match Tesla's 77 percent market cap share. Even if the total AV market doubles or triples in size, it is still not sufficient to justify the level of investment we are seeing. Autonomous vehicles are a niche interest, and most people are not willing to purchase them.For example, Chinese car buyers are more open to autonomy compared to American buyers, while Indian consumers have opinions closer to those of Americans. Applying U.S. attitudes towards autonomy to the entire global market is an oversimplification. Without autonomous vehicles on the roads and available for sale, it is difficult to predict the growth of the market.Update 11/19/2024 3:02 PM: There were math errors in the original calculation due to a typo in the calculator. The theoretical size of the AV market is $434 billion, not million. An 11 percent market share would amount to about $4.8 billion, which is still far short of 77 percent of Tesla's $1.08 trillion market cap, which is $831.6 billion. This calculation is based on a future where Tesla achieves Toyota-like dominance in the AV category.