NHTSA Opens Investigation into Tesla Autopilot Software

On Aug. 16, the U.S. National Highway Traffic Safety Administration opened an investigation into Tesla's TSLA autopilot software following 11 crashes from January 2018 through July 2021 where the software was engaged. Having reviewed the NHTSA report, we think the incidents highlight the need for Tesla to continue to improve its autonomous software before the company is likely to see a large revenue increase from its subscription-based full self-driving software. This is in line with our view that Tesla's autonomous software will not contribute a large portion of revenue in the near term. While the outcome of the investigation is uncertain, the agency is investigating the software, rather than any hardware on a Tesla. As a result, we think the most likely outcome will include an over-the-air software update, which Tesla already regularly does, and additional warnings about the limitations of driving with autopilot. With our outlook intact, we maintain our $570 per-share fair value estimate and narrow moat rating for Tesla. Tesla shares were down around 5% at the time of writing. At current prices, we view Tesla shares as slightly overvalued with the stock trading in 3-star territory but roughly 20% above our fair value estimate. Accordingly, we reiterate our very high uncertainty rating for Tesla. In all 11 crashes, a Tesla vehicle struck one or more vehicles at a first-responder scene. Most of the incidents took place after dark, where the crash scenes included typical control measures such as first-responder vehicle lights, flares, an illuminated arrow board, and road cones. We think this highlights the limitations of level 2 autonomous software, which is the classification for Tesla's autopilot. While the software can take over many parts of driving features for more normal highway conditions, first-responder scenes represent a situation where drivers should likely disengage the software when approaching the scene and resume full manual control of the vehicle.

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