Earlier this week, the
Mercedes brand announced a partnership with the graphics chip giant
to build the world’s first “software defined vehicles”. It’s a bold statement that aimed to target
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 with Mercedes-Benz to do this. “
In some respects, Nvidia and Mercedes play a catch-up role. Something the auto industry is still used to today about 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, on the other hand, is probably not immune to oversight of the joint venture. The company and CEO Elon Musk have been questioned several times before. Tesla’s early opponents questioned the company’s range of electric vehicles, charging infrastructure, pricing and manufacturing costs. They questioned its cash flow. The company has responded to these challenges and Musk now heads the second most valuable automaker in the world.
But big for a car maker, it’s not big for a software builder. Nividia is bigger than Tesla. Its market capitalization is approximately 240 billion dollars. Tesla represents around $ 180 billion. Daimler’s market capitalization, by 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 Tesla brand, the company also sells autonomous driving as a feature 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 securities. The Nvidia share, for its part, is appreciated on Wall Street. About 80% of analysts covering the enterprise rate share the equivalent of Buy. The average purchase ratio of the shares of
Dow Jones Industrial Average
is about 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
Fiat Chrysler Automobiles
Even more bearish target prices still imply that Tesla is little more than a traditional automaker.
Tesla stocks 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
Daimler shares fell about 29% in 2020.
Write to Al Root at [email protected]