Uber CEO Dara Khosrowshahi Issues Warning to Tesla Investors

This summer, a significant amount is at stake for ride-sharing companies.

Tesla (TSLA) is set to introduce its own robotaxi service in Austin, utilizing a fleet of Tesla-owned vehicles equipped with the initial version of its unsupervised Full Self-Driving (FSD) software.

However, Tesla won't be operating in isolation this summer, as Uber (UBER) will also be offering rides in one of Alphabet's (GOOG) Waymo vehicles in Austin through a partnership between the two companies. Uber’s CEO, Dara Khosrowshahi, has shared some cautionary insights regarding Tesla's self-sufficient plans.

Khosrowshahi emphasized at a recent conference, "Demand often is quite variable." This highlights why a company like Alphabet, which can invest billions of dollars into developing an autonomous vehicle fleet, has chosen to collaborate with Uber in various markets. Uber contends it has tackled the major hurdles involved in launching an autonomous vehicle service.

Several Wall Street analysts believe Tesla's current stock value is closely linked to its ability to successfully implement autonomous driving and ride-sharing. Therefore, if Tesla manages to roll out its autonomous vehicles this summer, it could represent a pivotal moment for the company.

The Challenges of Launching a Ride-Sharing Service

While it may seem straightforward for Tesla to deploy a fleet and create an app for riders, launching a ride-sharing service encompasses much more complexity.

Firstly, Tesla must stimulate demand for its service. Additionally, it must address factors related to supply, such as pricing, fleet management, and the logistics of routing vehicles so they are accessible throughout their service area.

Fleet management poses significant risks. Although vehicles are costly, meeting peak demand likely means many cars will be idle during off-peak hours. Consequently, Tesla may need to invest considerable capital upfront, hoping that demand will eventually rise to match the available supply.

If Tesla fails to place enough vehicles into service and demand outstrips supply, customers might face long wait times and turn to competitors for a ride—in most cases, that competitor would be Uber.

In contrast, Uber already boasts 171 million active users each month on its platform, significantly exceeding similar apps, and it’s growing rapidly. Moreover, Uber can ensure high usage rates for a smaller autonomous fleet by combining its vehicles with human drivers and adjusting pricing dynamically to align supply with demand.

Uber also manages the routing, pricing, and customer support aspects of its service. Although Uber charges a fee for these services, the value they provide can justify the cost.

What Should Tesla Investors Consider?

There are several critical points for Tesla investors to think about.

Khosrowshahi's perspective is not neutral; it’s evident he believes that collaborating with his company for launching autonomous rides in a new city is more economically viable than going it alone.

If Tesla is prepared to invest in the necessary infrastructure to maintain a fleet that meets peak demand, it could yield significant returns in the future. Elon Musk excels at generating demand for his products, and many Tesla enthusiasts who cannot afford to own one may still be willing to pay for a ride in one occasionally.

However, there are substantial risks associated with this strategy, possibly greater than many investors realize, especially given the current stock price. Shares are trading at over 100 times future earnings estimates, implying a high expectation for Tesla's earnings growth as its robotaxi service launches.

In contrast, Waymo is adopting a much more cautious strategy by gradually introducing its ride-sharing service to new cities and exploring various partnerships with Uber. In some locations, Waymo will sell vehicles to Uber, allowing Uber to fully manage the fleet. In other areas, Waymo will retain ownership of the fleet but provide services through the Uber app, and in yet others, Waymo will offer rides through its app (mostly in cities where it has conducted extended vehicle testing). This strategic testing will help identify the best financial model for scaling its service.

Tesla's approach may be risky, but this is familiar ground for its shareholders.

Uber, Tesla, Investors