Tesla's Secret $68 Billion Business

Shares will have massive upside when the market adds this to its valuation

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Ryan Vanzo
Sep 20, 2016
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Tesla (

TSLA, Financial) has been hammered lately. Many bears are warning of potential Securities and Exchange Commission investigations all while General Motors (GM, Financial) is stepping up competition in the electric vehicle market. Even the company's ostensible saviorthe Model 3 is likely facing production delays.

Investors could use some good news.

However, perhaps the greatest thing the company has announced in recent months has been completely ignored by the market. It's a developing segment at Tesla that could be worth more than $60 billion.

The future of cars will be self-driving

To anybody following the automobile industry, it won't be news to hear that automated self-driving cars are the future. According to BI Intelligence, 10 million self-driving cars will be on the road by 2020.

Self-driving cars will open up huge market opportunities for nearly every sector of the economy. One industry that will undoubtedly go through major changes is ride-sharing services like Uber and Lyft.

Lyft's president and co-founder John Zimmer predicts that by 2021 "a majority" of rides on its network will be in autonomous vehicles. By 2025, he says personal car ownership in U.S. cities will be a thing of the past.

Fairly soon, the $100 billion annual U.S. automotive market will shift considerable dollars over to ride-sharing services. That's not even including the $11 billion taxi market.

Whoever can develop a large installed fleet of self-driving cars will win the race. That's likely what's driving Uber's current $68 billion valuation, a price point that's been re-established through multiple financing rounds.

This is where Tesla's value will be felt

As part of his "Master Plan Part 2," Tesla CEO Elon Musk elaborated on the automakers plan for the role of car ownership and ride sharing in the future.

Once Tesla achieves full autonomy and it is approved by regulators (two to three years based on his previous statements), the automaker plans for Tesla owners to be able to loan their cars to a "shared autonomous fleet" and make money while they are not using them.

You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while youre at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost. This dramatically lowers the true cost of ownership to the point where almost anyone could own a Tesla. Since most cars are only in use by their owner for 5% to 10% of the day, the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not.

While it's well behind Uber and Lyft right now, the future winner will be whoever has a large automated installed fleet, not just existing drivers. If Tesla can pull this off, it will instantly have hundreds of thousands of self-driving cars on the road (when including previous sales and Model 3 reservations).

It's no wonder that Uber's CEO once said that if Tesla made a fully autonomous car, he would buy every single one of themautonomous cars are that important to the future of ride sharing.

Silicon Valley venture capitalist and early Tesla investor Steve Juvertson recalled a conversation he had with Uber CEO Travis Kalanick:

Travis recently told me that in 2020, if Teslas are autonomous, hed want to buy all of them. He said all 500,000 of estimated 2020 production Id want them all but he couldnt get a return call from Elon.

Now we know why he didn't get a call backTesla has become a major competitor.

With a market cap of $31 billion, Tesla is worth less than half of Uber. Investors are likely still valuing the company as a car manufacturer. The future, however, could be much more lucrative. When Tesla starts to replicate Uber's success, expect shares to rise considerably.

Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.

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Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.