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A driverless car is on display in the Mercedes hall
Boris Roessler / DPA / AFP via Getty Images
Earlier this week, the Daimler Mercedes brand announced a partnership with graphics chip giant Nvidia to build the world’s first “software defined vehicles”. It’s a bold claim, and one meant to target Tesla.
But his statement is not the whole story.
There is a little bit of hype embedded in the ad. “This is the largest association of its kind in the transportation industry,” said Jensen Huang, CEO of Nvidia (ticker: NVDA) in the company’s press release. “We are breaking new ground on multiple fronts, from technology to business models, and I can’t imagine a better company to do this than Mercedes-Benz.”
Tesla (TSLA) could make an exception to the first and largest terms. You have been working on your own software for many years. In fact, New Street Research analyst Pierre Ferragu noted in a recent report that Tesla has released more than 300 software updates in the past nine years. The updates addressed issues ranging from charging time to autonomous driving features.
Nvidia and Mercedes are, in some ways, playing catch up. Something the rest of the auto industry is used to these days compared to Tesla. Almost every other automaker around the world follows an EV-focused strategy today, something unthinkable a few years ago. Tesla CEO Elon Musk deserves a lot of credit for the change. Tesla led the development of EV and is now also a leader in software.
Tesla, meanwhile, is likely unfazed by the joint venture’s oversight. The company and CEO Elon Musk have been doubted many times before. Tesla’s first detractors questioned the company’s range of electric vehicles, charging infrastructure, prices and manufacturing costs. They questioned their cash flow. The company has faced those challenges, and Musk now runs the second most valuable car company in the world.
Great for an automobile company, however, it is not great for a software company. Nividia is bigger than Tesla. Its market capitalization is approximately $ 240 billion. Tesla is approximately $ 180 billion. Daimler’s market capitalization, by comparison, is approximately $ 41 billion. Tesla is in the middle of the two because it’s part technology, part auto company.
Morgan Stanley analyst Adam Jonas says Tesla is the only company that “fully monetizes its autonomous driving assets at scale.” In other words, Tesla generates real money from its internally developed autonomous driving solutions.
In addition to adding to the Tesla brand, the company sells autonomous driving as a feature it calls autopilot. Customer saves real money to buy autonomous driving technology. Tesla did not respond to a request for comment on the percentage of vehicles sold with autopilot capabilities.
Jonas covers the automotive sector. He is more familiar, relatively speaking, with cars than with microchips. But recently he tried to assess the software opportunity lurking within Tesla. According to the analyst, it may be worth between $ 100 and $ 200 billion, but he points out that there are many risks to achieving a scenario in which software sales, including payments for periodic updates, are a significant part of overall sales. .
The software affects everything, including driving. All cars are getting smarter. It appears in quality reports. JD Powers classifies cars based on initial quality each year. JD Powers metric usage is issues for every 100 cars in the first three months of ownership. The 2020 industry average reached 166 problems for every 100 cars. The 2019 initial quality average was only 93 problems.
The quality of the car does not go south. In fact, drivers are probably happy to deal with one more problem per car. Instead, cars are getting more complicated. There is a greater chance that problems will arise. “Premium brands generally equip their vehicles with more complex technology, which can cause problems for some owners,” read the recent JD Powers press release.
Finally, investors will have to think in terms of software and hardware when buying car stocks. Nvidia’s share, meanwhile, is beloved on Wall Street. About 80% of the analysts who cover the company’s rate share the Buy equivalent. The average purchase rating ratio for stocks on the Dow Jones Industrial Average is approximately 55%. Tesla, on the other hand, is more controversial among Wall Street analysts. Only about a quarter of analysts rate Buy stocks.
Additionally, the average analyst price target for Tesla shares is approximately $ 720 per share, well below recent levels. But at that price, the company would still be valued at around $ 140 billion, even more than Ford Motor (F), General Motors (GM) and Fiat Chrysler Automobiles (FCAU) combined.
Even more bearish target prices still mean Tesla is little more than a traditional automaker.
Tesla shares have risen approximately 135% to date. Nvidia’s shares have gained about 57%. Both are much better than the comparable performance of the S&P 500. Daimler’s shares have fallen approximately 29% in 2020.
Write to Al Root at [email protected]
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