Summary List Placement
Even as its competition in the electric-vehicle space heats up, Tesla will be its most profitable player for years to come, analysts at UBS said in a Wednesday report on the future of the auto industry.
The team of analysts, led by Patrick Hummel, project that Tesla and Volkswagen will easily be the two largest producers of EVs by 2025, but that Elon Musk’s automaker will vastly outperform every other electric car company in terms of profits.
They estimate that Tesla will sell 2.3 million EVs that year and turn an operating profit (OP) of $20 billion. Volkswagen, they project, will sell 2.6 million electric cars for a roughly $7 billion profit. The next closest competitor, by UBS’ estimation, will be General Motors with 800,000 EVs sold and approximately $2 billion in earnings from them.
In 2020, Tesla’s first full year in the black, it sold just shy of 500,000 vehicles and netted $721 million. But roughly $1.6 billion of its $31.1 billion in revenue came from selling regulatory credits to competing automakers that need them to meet emissions standards.
Tesla’s massive profitability advantage won’t come from its cars, but rather from its software offerings, the analysts said.
Tesla is the only automaker that is able to beam out meaningful software updates to its vehicles, and its Autopilot driver-assistance system — which can be continually improved via over-the-air updates — is among the best the industry has to offer. An even more advanced automated-driving feature, “full self-driving” mode (FSD), is on the way.
“We estimate that $9 billion of the $20 billion OP is directly related to the monetization of Tesla’s software capabilities (mainly full self-driving),” the analysts said. “VW should be well ahead of all other legacy OEMs, thanks to scale, but with a much smaller upside from software vs. Tesla.”
Although FSD isn’t capable of making cars fully autonomous yet, Tesla bulls say it has the potential to dramatically boost the company’s profits. For instance, Tesla could realize huge gains if it follows through on its promise to establish a network of autonomous taxis.
In Wednesday’s report, the analysts predicted that in the long term, EV-focused companies like Tesla will continue to widen their technology lead over traditional automakers. Legacy manufacturers will lose market share as consumers choose more advanced products, ultimately leading to consolidation.
“All large global OEMs including VW have accelerated software/digitization investments, but it remains to be seen if their strategies succeed. Tech companies and EV pure-plays are potentially in a better position to be the leading innovators,” they said, adding, “Players with a fully functional autonomous driving stack own the key to financial success.”