Tesla's Autopilot/FSD Recall is a Major Risk
Refunds alone would be $5 billion and full paybacks for the cars would be $19 billion
Key Points
Tesla’s Autopilot and Full Self-Driving (FSD) features have gone from being a valuation premium for Tesla’s stock to becoming one of its biggest liabilities.
The recall of FSD over safety concerns is seen by some as a non-issue for Tesla because it can be fixed via an over-the-air (OTA) update with little cost.
This neglects the legal implications from the 65 lawsuits involving Tesla’s Autopilot/FSD currently in US courts.
A full refund of all Enhanced Autopilot and FSD packages sold since Q4 2016 would amount to over $5 billion (see Figure-5), or 40% of 2022’s net profit and 11% of equity. A full refund of the 362,578 cars with these options sold would cost Tesla over $19 billion, or 1.4x Tesla’s 2022 net profit and 43% of its equity.
The FSD recall is also a direct blow to Elon Musk’s claim on the last earnings call that FSD safety statistics are “excellent”. The National Highway Traffic Safety Administration (NHTSA) ordered the recall based on 4 major safety issues that include potential accidents and infringements of traffic laws.
The recall may also dent sales of FSD—which were close to $1 billion in 2022 and 6% of Automotive Gross Profit—as customers hesitate while Tesla tries to solve the safety problems identified by NHTSA.
The key issue is what happens to Autopilot, which is the core of an 18-month investigation by NHTSA. Data disclosed by NHTSA shows that there have been 633 Autopilot crashes since July 2021 with 17 fatalities. It’s unlikely that NHTSA sits on this data without some kind of resolution.
While the recall of FSD involved 362,758 Tesla vehicles, the Autopilot probe by NHTSA covers over 830,000 cars.
It’s unlikely that Tesla can fix the Autopilot safety problems via OTA updates, as it tried to do so in October 2021, but failed. The updates were supposed to stop Tesla vehicles on Autopilot from crashing into stationary emergency vehicles on the highway, but since then, the number of such crashes has increased.
FSD Recall is a First Step to a Potential Autopilot Recall
The February 16th recall of Tesla’s FSD over safety concerns by the NHTSA could be seen as a non-event: Tesla can “fix” the safety concerns that NHTSA identified via OTA updates.
Also, the fact that NHTSA has not responded to questions about why there’s no deadline for the fix and how it will even be able to determine if the fixes were made (see this article), is another sign that NHTSA is going soft on Tesla, as usual.
But the FSD recall may only be the first step in launching a recall of Tesla’s Autopilot feature, which could be an even bigger issue. There has been an abundance of activity at NHTSA regarding Tesla’s Autopilot in recent months and the data they’ve collected on Autopilot crashes since 2021 is alarming (see Figure-1).
Figure-1: Tesla Autopilot Crashes Since July 2021
Source: NHTSA
A breakdown of the NHTSA data by month shows that Autopilot crashes rose fourfold in 2022, which is a steeper rate than Tesla’s 40% delivery growth in the US last year.
When NHTSA started its investigation of Tesla Autopilot crashes into roadside emergency responders in August 2021, there were only 11 cases being analyzed with 765,000 estimated vehicles affected. Last June, when this probe was upgraded to Engineering Analysis status (the final stage of a NHTSA investigation before deciding on a recall), there were 14 cases with 830,000 Tesla vehicles affected.
The FSD recall can—so far—be fixed by OTA updates, but a recall of Autopilot may not be that easy to fix. These Autopilot crashes into emergency vehicles have been happening since at least 2018, by NHTSA’s estimates.
If Autopilot were so easy to fix or had some sort of low-cost remedy to stop crashing, Tesla surely would’ve solved the problems by now. In fact, Tesla did try sending out OTA updates to stop Autopilot from crashing into emergency vehicles on highways in October 2021, but it didn’t work. The number of such cases under NHTSA’s investigation rose from 11 to 14 thereafter. And this drew the ire of NHTSA because Tesla sent out these OTA updates without formally filing for a recall first.
Mounting Regulatory Activity & Lawsuits Against Autopilot
In the past 3 months, there has been a flurry of activity among US regulators over Tesla’s Autopilot and FSD products (refer to Figure-2). On January 9th, the new acting head of NHTSA said the agency is moving as quickly as possible on the Tesla Autopilot/FSD investigation, the first public comment by NHTSA on the issue. The interesting point of what she said to reporters is that the Tesla probe involves “legal novelty”.
“We’re working really fast. We're investing a lot of resources…The resources require a lot of technical expertise, actually some legal novelty and so we're moving as quickly as we can, but we also want to be careful and make sure we have all the information we need.”
Ann Carlson, NHTSA acting head
Then there was a January 28th scoop by Bloomberg that the SEC is investigating Elon Musk on FSD claims that may have misled investors (link here). And when Tesla released its 2022 Annual Report on February 6th, the carmaker revealed a new probe by the US Department of Justice (DOJ), which implies criminality.
“Separately, the company has received requests from the DOJ for documents related to Tesla’s Autopilot and FSD features. To our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred. We cannot predict the outcome or impact of any ongoing matters. Should the government decide to pursue an enforcement action, there exists the possibility of a material adverse impact on our business, results of operation, prospects, cash flows and financial position”.
Tesla’s 10-K filing on February 6, 2022
Figure-2: Timeline of Autopilot/FSD Scrutiny by US Regulators
Furthermore, NHTSA’s own figures show that, since it began collecting data in July 2021, there have been 17 deaths from Tesla Autopilot crashes, 11 of which happened in 2022 (see Figure-3). The only other carmaker to have reported an ADAS-related fatality is Ford, with only one incident. Looking at the spike in fatalities last year and the increasing number of Autopilot crashes to a total of 633 since July 2021, it’s hard to see NHTSA not ordering a recall that at least requires a fix for Autopilot crashes, if not a shutdown of its use until Tesla can find a solution.
Figure-3: Tesla Autopilot Fatalities
According to PlainSite, a legal data transparency website, there are currently 65 lawsuits in the US involving Tesla Autopilot/FSD since 2017, with 11 added just in 2022. The FSD recall order by NHTSA on February 16th should provide tailwinds for these lawsuits, as NHTSA clearly called out the same flaws in FSD that many of these lawsuits are claiming as cause for legal action.
A good example is the Matsko v. Tesla, Inc. class action lawsuit, which is seeking damages for FSD steering into oncoming traffic, running red lights and failing to make routine turns. Those are three of NHTSA’s four safety concerns outlined in the FSD recall on February 16th.
The Financial Risks for Tesla from Autopilot/FSD Recalls
$5 billion for FSD Refunds: While it’s impossible to predict the outcome in the 65 lawsuits involving Autopilot/FSD currently in US courts, if even one of them sets a precedent for Tesla needing to refund FSD buyers, it could lead to at least $5 billion in total FSD refunds (based on the estimated take rate of Enhanced Autopilot and FSD through Q3 2022, according to @TroyTeslike).
$47 Billion for All FSD Cars: If the NHTSA recall somehow leads to Tesla having to refund all of the FSD-attached cars it sold, this could amount to $47 billion, which would wipe out Tesla’s equity of $45 billion. While some analysts use the average unit price of Teslas sold since Q4 2016 at $60,000, this method understates the true amount. The FSD attached rate is higher among the more expensive Models S and X, which on average have a 91% higher price than the Models 3 and Y (see Figure-4). While a full refund of the car to customers by Tesla is a severe outcome, it is a risk that should not be ignored.
Figure-4: Tesla FSD Take Rates by Model
Source: @TroyTeslike and company data
$1.7 Billion in FSD Deferred Revenues: Another important question that the NHTSA FSD recall order raises is whether Tesla was justified in recognizing deferred FSD revenues of $1.7 billion since 2018, 28% of which was booked in 2022. While $1.7 billion is only 14% of Tesla’s 2022 profits, the restatement of bookings since 2018 could cast further doubt on Tesla’s accounting practices.
Figure-5: Tesla’s Autopilot/FSD Deferred Revenue Recognition
Source: Tesla; Note that FSD deferred revenues include Supercharging and other items, but are largely made up by FSD
Finally, in its 2022 annual report, Tesla said that it plans to recognize another $639 million of deferred FSD revenues over the next 12 months. This might also be difficult after the NHTSA recall. In fact, by Tesla’s own stated methodology of FSD deferred revenue recognition, the NHTSA recall may cancel the likelihood of future recognition unless Tesla can satisfy NHTSA that it has solved the safety issues that prompted the recall.
“Revenue related to FSD is recognized when functionality is delivered to the customer and the portion related to software updates is recognized over time. For our obligations related to automotive sales, we estimate standalone selling price by considering costs used to develop and deliver the service, third-party pricing of similar options and other information that may be available.”
Tesla’s 10-K filing on February 6, 2022