FSD Upgrade Case Study (A Very Long Thread)

Dutch EV Lease Operator MisterGreen offered its customers a subscription-based FSD option.

Within just 2 weeks, a staggering 20% of its users upgraded.

When it comes to making estimates for Tesla’s future growth, most Wall Street analysts completely miss the potential of FSD. FSD will continue to see higher pricing and take-rates going forward, as the functionality and value offered to its customers increases.

Even those who understand this point typically don’t connect the next dot – that almost all existing Teslas can be upgraded to FSD at any point in the future. These upgrades will be pure margin for Tesla.

This pool of “Upgrade Candidates” is growing at an exponential rate, as Tesla delivers more cars to customers, the majority of whom do not opt for FSD. As of today, that pool of Upgrade Candidates is approximately 600,000 vehicles. By YE 2021 I forecast it will be ~1.7M.

I have been struggling with how to reasonably estimate how many of those Upgrade Candidates might opt to upgrade in any given quarter. Most people I asked figured at most 10% of customers might upgrade. https://twitter.com/MatchasmMatt/status/1274594793985802241

In Q3 I estimated 3% of the existing fleet, based on improved performance of the tech, the impending price increase, and seeing more tweets like this: https://twitter.com/TeslaS3XY_/status/1277860868030525440

Which brings us back to MisterGreen. @fminderop is the Co-Founder of MisterGreen, a Dutch company which owns 2,500 Teslas and leases them out to customers. His company is incredibly interesting and Florian is very forward-thinking on the potential for Teslas to appreciate.

In mid-June, MisterGreen offered ~1,600 of its customers the opportunity to upgrade to FSD for only €40 / month ($45). MisterGreen also has the right to increase that price as more features become released. In just two weeks of this offer being made, 300 of their customers...

opted for an upgrade, or ~20% of those who received the offer. Satisfied customers took to Twitter to explain the rationale for their upgrade. https://twitter.com/raulpesch/status/1275875852341981195

This number blew my mind when I first heard it, and I immediately started thinking of the implications for Tesla once they offer an FSD subscription package. Perhaps a 3% upgrade rate was appropriate for estimating the number of customers who would upgrade if they had to...

pay $7K in full, but I never contemplated how much larger the number could be if offered as a subscription.

I also started thinking about the specific facts in the MisterGreen case and concluded that both the $45 monthly cost and the 20% upgrade rate seemed quite likely to be lower than what Tesla could see if they rolled out a similar package globally.

This case study offers a very helpful tool in trying to estimate the potential financial impact of FSD subscriptions on Tesla’s bottom line. We also know from the Q1 call that Tesla is planning to launch this service later this year. https://electrek.co/2020/04/30/tesla-self-driving-subscription-service-price/

It seems quite reasonable to me that the combination of a 20% upgrade rate at a $45 monthly cost would set a floor of what Tesla could expect if it offered the same package. If we apply these figures to the pool of 1.7M upgrade candidate the result is $185M of incremental margin.

I would expect the actual impact to be higher than this. I think Tesla would likely offer the subscription at a price of around $135 / month, and I would think there would be at least a 10% upgrade rate at that price, or $277M in 2021.

That may not sound like a lot, but keep in mind this is recurring annual margin and the number would grow over time as Tesla’s fleet continues to expand. I can envision the rate being substantially higher than this in the future as the functionality continues to improve.

Nevertheless, if we assume simply that 10% of new sales will opt to subscribe to FSD at a price of $135 per month, we get a rapidly growing pool of FSD subscribers.

These subscribers will create a recurring cash flow stream that rapidly increases over time. This will transform Tesla’s business model from primarily one-time automotive sales into a recurring cash flow SAAS giant.

By the end of the decade, even assuming no increases to upgrade rate or price over time, Tesla would be generating over $7B per year. Using a DCF analysis, this cash flow stream is worth $55B. This is about ¼ of Tesla’s total market cap, and nobody is pricing in this opportunity.

All this opportunity assumes relatively modest upgrade rates and pricing, especially when considering how quickly the software is improving. Take rates could well be over 50% at some point this decade.

Or even better, what if Tesla can solve autonomy and generate drastically higher cash flows per vehicle? If either of those scenarios comes true, the stock price which today may appear somewhat “frothy” would seem rather quaint by comparison.

We know this businesss model is coming very soon, but almost nobody (myself included) had considered it in their valuation of Tesla. Huge thanks to @fminderop for the data, and let us all know how this story continues to unfold! @threadreaderapp unroll