Tesla’s new AI frontier: Unveiling the game-changing implications of its latest breakthrough

Tesla (TSLA -1.78%) It has earned a reputation for breaking records, defying expectations and constantly making technological advances. The company is on track to cement that reputation with its biggest performance to date.

On August 25, CEO Elon Musk posted a 45-minute video of himself in the driver’s seat of a moving Tesla Model 3, while not driving. To demonstrate the new version 12 (broadly abbreviated as “v12”) of Tesla’s full self-driving (FSD) software, Musk demonstrated the vehicle parallel-parking, starting and stopping at traffic lights, and turning roundabouts all by hand. His phone to record video.

A person is reading a book while in the driver's seat of a car on the highway;  The windshield is labeled as self-driving.

Image source: Getty Images.

Tesla is one step closer to full autonomy in its vehicles

Although the v12 still has limitations and needs significant refinement, the software represents a significant leap forward in Tesla’s quest to achieve Level 4 or Level 5 autonomy — levels where drivers don’t need to monitor the car while it’s in motion.

What differentiates v12 from previous versions of FSD is its reliance on neural networks powered by artificial intelligence (AI). Past FSD software used neural networks to map the vehicle’s surroundings, but required hard coding of the vehicle by Tesla programmers. With v12, humans are no longer required to define specific responses.

Thanks to advances in AI development, the v12 can interpret and identify the best response for the vehicle on its own. By analyzing metric tons of video and driver behavior collected from its 4 million vehicles worldwide, Tesla’s supercomputer Dojo and Host Nvidia Graphics processing units (GPUs) are able to train neural networks to make the right decisions in any situation.

Why the v12 is a big deal for Tesla

Developing a response for a self-driving car was a daunting task for Tesla’s programmers. The unpredictable nature of driving meant they had to account for a variety of variations, limiting the capabilities of previous versions of Tesla’s FSD.

However, v12 and advances in self-training neural networks will make human programmers redundant, increasing autonomy and the speed at which neural networks learn. Now, Tesla’s biggest challenge in achieving levels 4 and 5 of autonomous driving lies in its ability to collect and process video data. Fortunately, this task should be much easier than the initial challenge of developing and training a neural network, as Tesla already has a large fleet of video-gathering vehicles and its own computing infrastructure to handle the heavy lifting.

Taking Tesla to new heights

While Level 4 or 5 autonomy will make the roads safer and a noble endeavor in itself, the development of a more advanced FSD will help Tesla reach its ultimate goal of creating a robotaxis business. Developing such a service is currently Tesla’s number one priority, largely because Elon Musk has said he believes there is “semi-infinite demand” for it and it could transform Tesla’s revenue streams.

While Musk has been known to exaggerate timelines and express confidence that Tesla shares could rise 10 times their current prices, he is not alone in recognizing that a fleet of robotaxis could revolutionize Tesla’s finances and potentially one of its most valuable companies. the world

In an attempt to gauge how profitable a robotaxi business would be for Tesla, investment firm Arc Invest (which has some big Tesla fans) released a report in April 2023 highlighting the findings from a Monte Carlo simulation.

The results were grouped into bearish scenarios, average scenarios and bullish scenarios. Based on the results, Ark Invest hypothesizes that a successful implementation of robotaxis could generate anywhere from $200 billion in a recession to nearly $613 billion in a boom. Furthermore, Robotaxis is estimated to contribute more than two-thirds of the company’s future earnings before interest, taxes, depreciation and amortization (EBITDA).

As with any simulation or model, Arc Invest’s analysis has limitations. Still, even in its bear case, in which Robotaxis generates just $200 billion in annual revenue, that would be a 700% jump from Tesla’s current $25 billion in revenue.

moving forward

Although simulations like the one conducted remain speculative, they shed some light on how transformative the achievement of autonomous driving and the development of the robotaxis business could be for Tesla. With its shares down more than 30% from their all-time highs, now could be an opportunistic moment for investors.

Macroeconomic factors such as inflation and rising interest rates have eroded Tesla’s profit margins and are the primary reason the stock price has taken a hit. But the company remains confident in its ability to weather short-term market fluctuations due to its strong financial position and continued record production and revenue. With a highly profitable robotaxis business and the possibility of FSD on the horizon, Tesla could lead the AI, electric vehicles (EVs) and portfolio for years to come.

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