Raising Tesla's FVE on Improved Outlook for AV Software

We are raising our fair value estimate to $600 per share from $570 for narrow-moat Tesla TSLA following AI day. At current prices, we view Tesla shares as fairly valued with the stock trading a little over 10% above our fair value estimate but in 3-star territory. Our largest key takeaway from Tesla's AI day was the progress that the company is making on its Level 3 autonomous vehicle software known as full self driving. The biggest change to our forecast is our long-term outlook for Tesla's Level 3 autonomous vehicle software. While we think the software will not drive significant revenue or profit growth over the near term, we increased our long-term outlook as we expect higher subscriptions. The software, which is currently still in beta testing mode, appears to be closer to a rollout than we had expected. As the company continues to improve this product, we think Tesla is likely to see an increased number of subscriptions over the next decade, boosted by its growing fleet. Other highlights included Tesla's growing non-automotive ancillary business, which includes Dojo and humanoid robots. We added these businesses to our model, however, each accounts for less than 1% of our fair value estimate. Dojo is the supercomputer that Tesla is using to train its AV software. However, over the next several years, the company plans to begin selling AI training to other companies using extra processing space. This should generate operating profits in line with software companies. Finally, Tesla plans to develop humanoid robots that can be used to perform dangerous or repetitive tasks, by creating a repurposed version of the same camera-based autonomous software that it is developing for cars in the humanoid robots, which will be programmed to perform simple tasks. We think this makes sense as Tesla's AI software works by reacting to the environment, rather than being preprogrammed. This should allow Tesla to develop a version of its AI software for platforms outside of vehicles.

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