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 assertion, and intended to target Tesla.
But their statement is not the whole story.
There is a bit of hype built into the ad. “This is the largest partnership of its kind in the transportation industry,” said Nvidia CEO (ticker: NVDA) Jensen Huang in the company press release. “We are innovating on many fronts, from technology to business models, and I can’t imagine a better company to do this than Mercedes-Benz.”
Tesla (TSLA) could deviate from the most important and first terms. He has been working on his own software for many years. In fact, Pierre Ferragu, an analyst with New Street Research, pointed out in a recent report that Tesla had released more than 300 software updates in the past nine years. The updates addressed issues ranging from charging time to autonomous driving features.
In some respects, Nvidia and Mercedes play a catch-up role. Something the auto industry remains used to today regarding Tesla. Almost every other automaker around the world is pursuing an electric vehicle strategy these days, which was unthinkable a few years ago. Tesla CEO Elon Musk deserves a lot of credit for this change. Tesla led the development of electric vehicles and is now its leader in software.
Tesla, for its part, is probably not shaken by oversight of the joint venture. The company and CEO Elon Musk have been questioned several times before. Tesla’s first detractors questioned the company’s range of electric vehicles, charging infrastructure, prices and manufacturing costs. They questioned its cash flow. The company has met these challenges and Musk now heads the second most valuable automaker in the world.
But big for a car manufacturer, it’s not big for a software publisher. Nividia is bigger than Tesla. Its market capitalization is approximately 240 billion dollars. Tesla represents around $ 180 billion. Daimler’s market capitalization, for comparison, is approximately $ 41 billion. Tesla is in the middle of the two because it is both a technology and an automotive company.
According to Morgan Stanley analyst Adam Jonas, Tesla is the only company to “fully monetize its large-scale autonomous driving assets”. In other words, Tesla generates real money from its internally developed autonomous driving solutions.
In addition to adding to the hallmark of the Tesla brand, the company sells autonomous driving as a function it calls autopilot. Customer buys real money to buy autonomous driving technology. Tesla did not respond to a request for comment on the percentage of vehicles sold with autopilot functionality.
Jonas covers the automotive sector. He knows cars, relatively speaking, better than microchips. But he recently tried to capitalize on the software opportunity hiding inside Tesla. This may be worth another $ 100 billion to $ 200 billion, the analyst said, but notes that there are many risks involved in arriving at a scenario where software sales, including payments for regular updates, represent 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 each year according to their initial quality. The metric used by JD Powers corresponds to problems per 100 cars during the first three months of possession. The industry average in 2020 was 166 problems per 100 cars. The initial quality average of 2019 was only 93 problems.
The quality of the cars does not go south. In fact, drivers are probably happy to handle about one more problem per car. Instead, the cars get more complicated. Problems are more likely to arise. “Premium brands generally equip their vehicles with more complex technologies, which can cause problems for some owners,” said the recent press release from JD Powers.
Ultimately, investors will have to think in terms of software and hardware when buying auto securities. The Nvidia share, for its part, is appreciated on Wall Street. About 80% of analysts covering the corporate rate share the equivalent of Buy. The average equity rating ratio in the Dow Jones Industrial Average is around 55%. Tesla, on the other hand, is more controversial among Wall Street analysts. Only about a quarter of analysts assess the stocks to buy.
In addition, analysts’ average price target for Tesla stock is around $ 720 per share, well below recent levels. But at that price, the company would still be valued at around $ 140 billion, more than Ford Motor (F), General Motors (GM) and Fiat Chrysler Automobiles (FCAU) combined.
Even lower target prices still imply that Tesla is little more than a traditional automaker.
Tesla shares have risen about 135% since the start of the year. Nvidia shares gained around 57%. Both are much better than the comparable performance of the S&P 500. Daimler shares fell about 29% in 2020.
Write to Al Root at [email protected]