How the FSD Price Increase and Inflation Reduction Act Would Help Tesla

This month, there have been two developments related to Tesla. The company’s CEO Elon Musk announced that Tesla would increase the FSD (full-self driving) price by $3,000 to $15,000.

Separately, President Joe Biden signed the Inflation Reduction Act which would hasten the EV (electric vehicle) adoption in the country. Tesla cars stopped qualifying for the federal EV tax credit as it crossed the minimum threshold of sales. Now, even Tesla cars would be eligible for the subsidy from 2023.

Inflation Reduction Act to Benefit Tesla

Apart from Tesla, General Motors and Toyota cars also did not qualify for the EV subsidies after crossing the threshold. So, the expansion of EV tax credit to all Tesla cars is certainly a positive for the company especially as the company is launching new models. It also said that Semi deliveries would start from this year only while Cybertruck’s deliveries would begin from 2023.

Ford has already taken the lead in the EV pickup industry and started delivering the all-electric version of its F-150 earlier this year only. Rivian also has a pickup model but it would be a battle royale between Cybertruck and F-150. While the former has an unconventional design and has boasted of strong pre-orders, the latter’s ICE (Internal Combustion Engine) model has been North America’s best-selling pickup for decades.

Bernstein is not convinced about Tesla’s valuation

Like other analysts, Toni Sacconaghi of Bernstein also believes that the Inflation Reduction Act is a positive for Tesla. He however added, “while we acknowledge TSLA’s innovation and financial success, we continue to struggle to justify the company’s valuation.”

Sacconaghi has a $450 target price on Tesla before the split which would mean an almost 50% downside from current levels. He said, “TSLA’s valuation is higher than all other major auto makers combined, and appears to imply huge volume AND industry-leading profitability going forward, which is historically unprecedented.” Sacconaghi believes that Tesla’s risk-reward is unattractive for long-term investors.

Wall Street on TESLA stock

When it comes to valuations, no other stock divides Wall Street as Tesla. Bears like JPMorgan compare Tesla’s valuations with fellow automakers and assign quite a low target price for the Elon Musk-run company. Even Ashwath Damodaran, who is known as the “dean of valuation” believes that Tesla is way too overvalued.

Tesla is working on an autonomous driving system and recently raised the subscription price to $15,000. While the company does not specify how many people opt for the subscription Musk said that over time most cars would have the FSD (full-self driving). The company had raised the FSD price earlier by $2,000 earlier this year also and Musk expects the software to eventually cost $100,000.

FSD has missed several deadlines

During the Q4 2021 earnings call, Musk expressed optimism of progress on the FSD in 2022 even as the regulators are not too happy with the nomenclature as it misrepresents its current abilities. “I would be shocked if we do not achieve full self-driving, safer than a human, this year,” said Musk on the FSD. That said, the company has missed several deadlines on the FSD and robotaxis.

Ralph Nader asks NHTSA to issue an FSD recall

While the NHTSA (National Highway Traffic Safety Administration) has always been against the term “FSD” earlier this month Ralph Nader called upon the agency to issue a recall of FSD. He said, “Tesla’s major deployment of so-called Full Self-Driving (FSD) technology is one of the most dangerous and irresponsible actions by a car company in decades.”

He added, “This nation should not allow this malfunctioning software which Tesla itself warns may do the “wrong thing at the worst time” on the same streets where children walk to school. Together we need to send an urgent message to the casualty-minded regulators that Americans must not be test dummies for a powerful, high-profile corporation and its celebrity CEO. No one is above the laws of manslaughter.”

Elon Musk on FSD

Here it is worth noting that the name FSD can be misleading as autonomous driving is not fully equipped yet and even Tesla advises car drivers to keep their hands on the steering all the time even if the car is on autonomous mode. Musk recently scolded a Tesla driver by the name of James Locke who complained about the FSD’s functionality on Twitter.

While Musk is a self-proclaimed “free speech absolutist,” he does not take criticism sportingly. In FSD’s case, he had himself asked people for “negative feedback” on the software. In the past also, he has lashed out at analysts asking tough questions during the earnings call.

Software could account for the bulk of Tesla’s valuation

Currently, Tesla gets most of its revenues from the core automotive business. It is also scaling up the energy business and Musk expects it to become as large as the automotive business. However, the real value for Tesla investors would come from the software part of the business.

TSLA has scaled up production at the Shanghai plant which was its first factory outside the US and is now believed to be the most efficient also. The company uses the plant not only to satiate the demand from Chinese consumers but also uses it as an export hub. The country’s Berlin plant has also begun production. Tesla has been setting up factories in record time and its production ramp-up has impressed even critics.

Musk recently said that the Texas and Berlin plants are burning a lot of cash. However, after a visit to the Berlin plant, both Jefferies and UBS were impressed with the production ramp-up.

Tesla completed a stock split

Last week, Tesla completed its 3-for-1 stock split, which was the second split since 2020. After the 2020 stock split, Tesla stock continued to rally and ended the year with gains of 740%. The stock continued its good run in 2021 and added another 50% to its market cap. However, with the company’s market cap now above $900 billion, it remains to be seen if it can repeat the “magic” that we saw after the 2020 split.