Tesla’s Risk: Why the SpaceX IPO and Robotaxi Uncertainty Will Threaten TSLA Stock

TradingKey - Tesla (TSLA) now has two competing narratives tugging at investors' interests in somewhat opposite directions. The first is that the expected Tesla Robotaxi experience is baked into Tesla's valuation, but regulatory developments have raised questions over when and if the Tesla Robotaxi will reach the market. The next is that the long-awaited SpaceX IPO may drain some of the capital and enthusiasm that has buoyed Tesla shares.

Adding a further layer of uncertainty to Tesla’s results is a miss on deliveries for the first quarter and some waning enthusiasm from analysts. Altogether, the effect of these factors has been that even minuscule disappointments can hugely move the value of Tesla shares.

What Happened to Tesla’s Robotaxi Recently

Recently, U.S. regulators have widened their review of Tesla’s Full Self-Driving (FSD) capabilities to approximately 3.2 million vehicles, Reuters reports. The National Highway Traffic Safety Administration (NHTSA) has been evaluating whether the system can accurately identify lead vehicles and issue warnings during difficult driving conditions. The review process can take time and be iterative, resulting in a process in which greater scrutiny, increased parameters, and additional updates may delay Tesla from providing commercial Tesla Robotaxi services.

This is important because projected revenues from autonomous vehicles are connected to the long-term valuation. As Tesla continues to develop new technologies, the most recent shortfall in deliveries and fluctuating demand have led to increased volatility in the automobile sector for the immediate future, which indicates that stock price fluctuations will be correlated with any changes to the expected timing and economics of autonomy. In addition, the timeline for adoption could be delayed or restricted from a longer-term perspective if there is an extended regulatory process, even if the worst-case scenario does not occur; therefore, these factors will compress the timeline the market has priced in.

What Investors Need to Know About the SpaceX IPO

This year, it is anticipated that the SpaceX IPO will be among the most thrilling, and it may arrive this summer. Analysts are reporting a Starlink-based subscription revenues figure that puts the company’s valuation near or beyond $1.75 trillion; and with a history of delivering projects on time and under budget, the company is surprising very few in meeting the extremely ambitious timeline following the July application. If SpaceX turns out it is growing quickly and its unit cost is falling, a very high demand for SpaceX stock could develop, both from the general public and institutional investors.

Also, SpaceX going public will be an opportunity for most investors to have a more direct way to invest in Elon Musk’s vision for space and satellite operations, instead of buying Tesla stock and using that as a proxy for his broader ambitions. Indirectly, however, the move will influence the share price of Tesla—which has released the IPO into an established bearish market after, among other things, recently missing delivery targets and with JPMorgan Chase (JPM) downgrading the company’s price targets respectively.

Why Tesla’s Robotaxi Outlook is Unclear

Through its generalized vision-first approach, Tesla aims to leverage software to achieve consumer autonomy on the existing fleet of vehicles. This strategy has the potential to be powerful due to the broad capabilities of that strategy and how it leverages millions of on-road vehicles and potentially has a large data advantage due to the size of its existing fleet; the system must also be able to operate in as broad of an operating environment as possible, which adds complexity for both the engineering and regulatory acceptance process. As regulators open up and investigate more broadly, the amount of time between the completion of the engineering process and the receipt of feedback from regulators can take longer or require more evidence or additional safeguards before they allow for any commercialization, which will negatively affect how much premium investors put on the Tesla Robotaxi story.

Waymo is run by Alphabet (GOOG) (GOOGL), and its objective is to run geofenced robotaxi operations that can operate within designated cities. This approach simplifies the regulation and testing process for Waymo compared to other companies; however, it lacks the robustness of Tesla's vision. If Waymo or another company introduces fully autonomous rides in certain areas before Tesla, there is the potential that investors may question who will be able to capture early revenue and brand loyalty. As a result, Wall Street may price Tesla stock at a lower multiple due to the overall decline in the amount of cars sold and the impact of significant price reductions and increased dealership inventory over the last year.

How the SpaceX IPO Could Threaten Tesla Stock Price

Musk's success with launching and building satellites presents an additional opportunity for growth via an IPO of SpaceX. To date, there have been many investors who buy shares of Tesla to gain access to Musk's overall portfolio. However, with the IPO of SpaceX, it may change where investors decide to deploy their cash between these two companies.

Because of the stronger overall recurring revenue growth from SpaceX, as well as additional clarity on unit economics through the details being disclosed regarding SpaceX, some retail fans and/or institutional investors may decide to shift cash from Tesla and into SpaceX; this may be further impacted by the risk profile/attitudes regarding both companies.

Furthermore, while the majority of Tesla's valuation is comprised of optionality on software and autonomous driving capability, SpaceX may have superior fundamentals and a stronger growth story than Tesla without the automotive demand or regulatory environment as obstacles to its growth; therefore, there are institutions that might invest in SpaceX over Tesla as they are looking for a different risk-return profile from their investments.

Another issue is the concept of narrative scarcity; specifically, the degree to which a single source of support (a Musk-led company) for Musk's longer-term vision can create scarcity for that source (with an associated premium). Having two sources of support for that vision (i.e., Tesla stock and SpaceX stock) may allow this premium to be spread across both stocks at some point, particularly considering that the core Tesla business is facing increasing competitive pressure and declining growth. There’s no way of knowing whether there will continue to be a net outflow from Tesla’s stock, but the existence of two prestige, high-expectation assets associated with the founder creates a much higher hurdle for incremental buyers than if there were only one such asset.

What Investors and Musk's Fans Can Do Now

Separate your knowledge of investments from your hope. The known side of the equation shows that Tesla’s auto-cycle has cooled off compared to earlier years; margins are under pressure because of pricing pressure, and regulators have begun to take a harder look at FSD. 

Although Tesla continues to lead in its EV software integration and energy storage, there remains uncertainty about when it will materially begin generating revenue from autonomous driving due to potential changes in policy that cannot be accurately predicted by the market. 

On the hope side of the equation, if Tesla launches a successful robotaxi platform, it could create an enormous amount of new high-margin software revenue for the Company and change the Company’s overall revenue mix. However, it is highly likely that this process will involve further testing, multiple phases of deployment, and continued interaction with regulators.

Investors in Tesla stock should employ measured position sizes as part of their decision-making process as well as have set expectations when investing in Tesla stock. In addition, it may be wise for them to base their decisions on concrete catalysts such as the company's next earnings reports relating to inventory and pricing, the results from NHTSA's review of Tesla's safety measurements related to FSD, an update on FSD's safety measurements, and if there's any change in the way that they operate autonomously versus human-driven. 

Additionally, if the SpaceX IPO comes in at strong fundamentals and reasonable pricing, they need to determine how much their investment in SpaceX would change their overall exposure to other ventures that Elon Musk leads versus adding a SpaceX investment as an addition to their overall portfolio. A diversified portfolio containing a number of different companies and executives with varying time horizons can provide a way of mitigating the potential impacts of regulatory issues or mis-execution from any one company.

For those who have been supportive of the Musk brand for many years, maintaining an upside option in the event of down markets can be achieved through a balanced overall portfolio approach. One way to do this is to treat high-risk, high-uncertainty innovation bets as part of an overall portfolio, with the rest used to invest in cash flow from existing businesses that are historically less volatile than most other investments. Both of these options will allow you the opportunity to determine which company has the best chance of achieving its goals given its current progress towards achieving those goals. 

If you are interested in predictable cash flow and consistent production, waiting until SpaceX goes public may be a good option for your portfolio. If you think that software development will lead to real-world self-driving capabilities faster than is currently expected, investing a reasonable amount of money in Tesla might be a better option. Regardless of which option you choose, do not expect that any of the recent headlines about either of these two companies will quickly create substantial profits anytime soon.