Elon Musk’s Unconventional Stand

Although Tesla is best known for its fleet of EVs, Musk has made it abundantly clear on several occasions that he sees the company as an artificial intelligence (AI) and robotics business.

While there are many ways that Tesla can benefit from AI, the company’s primary focus is developing superior autonomous-driving technology. These ambitions riled up investors and “smart money” analysts on Wall Street for quite some time.

However, after years of intense research and development and aggressive spending, Musk is now being increasingly peppered about the progress of Tesla’s self-driving capabilities.

During Tesla’s second-quarter earnings call, Musk didn’t mince his words when he boldly said, “I recommend anyone who doesn’t believe that Tesla would solve vehicle autonomy should not hold Tesla stock. They should sell their Tesla stock.”

To me, this was Musk’s version of drawing a line in the sand. If investors think the idea of autonomous driving carries too much execution risk or is merely something more akin to science fiction, they should move on, Musk told investors.

While anyone can appreciate the honesty here, the brashness of this kind of communication can be jarring. Think of it this way: Have you ever heard a CEO tell you not to invest?

Despite the curtness of Musk’s words, I think investors were hit with a sobering dose of reality — and it’s high time to consider why Musk might actually be right.

Image source: Getty Images.

The Rationale Behind Musk’s Claim

Tesla’s autonomous-driving software is referred to as full self-driving (FSD) by management. Right now, there are two key ways that FSD can help ignite further growth at Tesla.

First, if Tesla’s FSD proves to be better than other autonomous-driving platforms available on the market, it could lead to an influx of new EV buyers.

The second opportunity for FSD lies in Tesla’s vision to build a large-scale fleet of self-driving cars — an initiative referred to as Robotaxi. If executed flawlessly, a fleet of self-driving vehicles could make shockwaves in markets such as ride-hailing, delivery and logistics, as well as rental car businesses.

However, there are also some inherent risks. For one thing, Tesla could be hurt if FSD does not scale exponentially. It’s pretty difficult to quantify how many people actually want to buy a car that drives itself or would feel comfortable riding in one.

Secondly, the Robotaxi rollout hasn’t been flawless so far. Earlier this year, Musk and his team told investors that a preview of Robotaxi would be revealed on Aug. 8. Unfortunately, this highly anticipated event is now delayed and only adds to speculation and skepticism of how good FSD really is and if it’s ready for widespread commercialization and adoption.

A third risk that I see as it pertains to FSD is related to costs. Developing self-driving technology requires robust spending on engineering, quality-assurance testing, and more.

For now, Tesla is relying heavily on training its FSD models on Nvidia‘s graphics processing units (GPUs) — an endeavor that is racking up billions in spend for Tesla at the moment.

For all of these reasons, if you can’t fully buy into the notion of autonomous driving, its potential to scale, and Tesla’s ability to execute, then Musk’s advice to pass over Tesla stock might be absolutely correct.

The Strategic Shift

As investors, it’s important to zoom out and think about the big picture. Throughout history, many successful businesses branched out from their initial products and evolved into more sophisticated operations.

I think Tesla is very much at a point in its evolution that it no longer should be viewed as an automobile company. The company’s transition from an EV and energy-storage business to a full-blown AI enterprise serves as the next frontier for Tesla.

To me, Musk’s comments should not be seen as intimidating or a warning. Rather, he’s making it clear that Tesla has an ambitious vision revolving around AI. If you’re not aligned with that, holding the stock will likely just be frustrating for you.

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