Tesla Q3 reports 'fantastic, but valuation comes from autonomous’: analyst

Roth Capital Partners analyst Craig Irwin joins The Final Round to break down what everything you need to know about Tesla’s latest earnings report and the company's role in the autonomous driving space.

Video Transcript

SEANA SMITH: Craig Irwin, he is with Roth Capital Partners, an analyst there. And Craig, we just heard Jared go through the numbers. It looks like a strong report here from Tesla when you take a look at the headline numbers. What did you think of the report?

CRAIG IRWIN: I think the report's fantastic. I think, really, they came through on automotive gross margins, 27.7%. Beat what people were looking for by about 350 basis points. So, strong on the top line, strong on the bottom line. They did it, but that's not what the valuation is driven by.

The valuation is really driven by autonomous. And what they ended up saying on the call will end up being of unstateably important relevance to the valuation in the stock. You know, realistically, you know, if those vehicles that were turned on for full autonomous beta this week do disappoint or end up having accidents or other problems, you could see a very severe impact in the valuation.

SEANA SMITH: Yeah, Craig, it's interesting here, just when we talk about what needs to happen and what we need to hear from Tesla to justify the type of reaction that we've seen in the stock price. So far this year, one of the big critical points, I guess, going into this report was that delivery target goal and the 500,000 deliveries. This year, they reaffirmed that goal. How important do you think that number is, just in terms of a psychological number?

CRAIG IRWIN: Well, psychologically, it's important. You know, investors will measure that. But just to put it in broader context, right, Tesla's looking at doing 500,000 units. They're being valued at basically the sum of the automotive industry versus Tesla. And, you know, in the US, I think-- what did we do-- 17 million cars last year. The [INAUDIBLE] was right around that.

It's a low bogey for a big valuation. The valuation has really driven autonomous, and people dreaming about Tesla's capabilities there. It's not so well anchored in reality. There's other companies with superior technology coming to market. There's other companies that, you know, really need to be taken seriously that I think investors are going to get to know over the next couple of years. And Tesla's model there is not bulletproof.

ANDY SERWER: Hey, Craig, you talk about autonomous, but how soon before we see any of that?

CRAIG IRWIN: So you have a beta that's basically been launched at this point. For you and me to see it, you know, I honestly don't think Tesla is going to have this within the next five years. Others are obviously testing. The biggest issue is the capabilities of the systems, the cameras, and then the chips for processing. And these have been a really big gating factor.

Tesla's chip that they used for AI for interpretation of the image is 76 tops trillion operations per second. There's a chip coming in the first quarter from a competitor that does 1,000 tops. You know, I think what Volvo ends up doing with that customer is going to end up being really, really important.

Because people say you really need 10,000 tops to do autonomous properly. Tesla doesn't have a line of sight in buying that. Tesla is, you know, behind the game, playing catch-up, trying to pretend it's the leader. And others have been more aggressively developing here. So valuation of the leader, yes, and as this technology comes into the market, people will properly factor that into the valuation.

RICK NEWMAN: Hey, Craig, I'm going to ask you to maybe go even a little deeper in the weeds on self-driving technology. So there are some people who say, look, Tesla's system is nowhere near the best system on the market. There's this whole question of whether you need to use LIDAR, which Tesla does not, versus are the cameras alone good enough, and so forth.

I mean, without getting into those technicalities, you know, we just talked about the electric Hummer, which will have GM's Super Cruise system. That's a self-driving system, something people think that's better than Tesla's. But Tesla, of course, says ours is the best. I mean, how do you rate Tesla on self-driving relative to these other competitors?

CRAIG IRWIN: So Tesla has been far more aggressive in actually getting things on the road than everybody else. And that's one thing that I like a lot. The reality, though, is that their system at multiple different points is inferior to the bleeding edge, what people are doing in other areas, that are putting together pieces to be sold to others. So the fundamental problem Tesla faces is optical illusion in the system that they're using.

Using LIDAR and some of these other technologies makes tremendous sense. And there's a lot of risk with Tesla's approach. A lot of the OEM customers of these emerging suppliers are taking much lower risk approaches. They're looking to maybe automate trucking to an extent so that the impact of trucking accidents is greatly reduced. Handling things in railyards and other industrial uses where the technology can be incremental, and you don't really need neatly curated lane markings for the stuff not to cause accidents.

JEN ROGERS: Hey Craig, I want to ask you about demand and particularly in China. In the results, they said that in Shanghai, they recently added a third production shift to their Model 3 factory. So as we look at the COVID numbers and China's economy gaining steam, is there anything we can extrapolate from that for demand in other places, do you think?

CRAIG IRWIN: So China is still on the upswing. It's a great market for Tesla. Chinese competitors really love electric vehicles. And Tesla is the premier brand today. You know, I think we can read this through to the importance of the Indian market for Tesla. We've heard from our sources that Tesla was going to enter India next year. Elon actually sent a tweet out about this, you know, in a month.

Realistically, this market will be just as important as China. You know, we also hear that they're in the process of finalizing factory sites. So there will be an India factory. So the tariff issues will be handled, just like they are in China and other places. And it's going to be a really important market. But, you know, is it going to be able to close this gap of half a million versus 17 million? No. It's going to be incremental and allow growth and keep those that are bullish on the stock engaged. And that's the importance.