ARK postulated that when autonomous taxis commercialize, Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) will not be able to collect the 20-30% take rates they enjoy today. Now, however, they could be facing a more immediate threat: a Tesla (NASDAQ:TSLA) ride-hailing network.

Elon Musk has said that, before launching an autonomous driving network, Tesla could debut a ride-hailing service with drivers, for good strategic reasons. Most importantly, a human-driven ride-hailing network would allow Tesla to collect real-world driving data to feed its autonomous driving artificial intelligence (AI) training system.

In addition to AI training data, we believe a human-driven network would give Tesla four more competitive advantages relative to other ride-hailing players:

  • Lower operating expenses;
  • More efficient financing and insurance;
  • Higher trade-in or residual values;
  • Premium prices.

Lower Operating Expenses

According to ARK’s research, the cost to drive a Model 3 is roughly 30% less than that of a Toyota Camry, as shown below. In other words, both Tesla and its ride-hailing drivers could benefit from operating costs lower than those at Uber and Lyft.

Source: ARK Investment Management LLC, 2020; Data sourced from: AAA Your Driving Costs; Uber Insurance

Based on ARK’s analysis, 20,000 ride-hailing service miles and 13,500 personal use miles per year, the cost to operate a Tesla Model 3 will be roughly 26 cents per mile, 30% lower than the 38 cents per mile to operate a Toyota Camry.

Tesla’s cost per mile advantage could play out in a number of ways: higher take-home pay for drivers, lower prices than Uber and Lyft, and/or higher platform fees for Tesla. A combination of all three could be possible.

More Efficient Financing and Insurance

While ARK assumed the same insurance costs for both vehicles in the analysis above, Tesla probably will self-insure and offer lower rates to its drivers. With the ability to collect driving data continuously from its vehicles and to provide discounts for the use of Autopilot, we believe Tesla will be able to offer rates lower than traditional insurance companies. While Uber does not breakout insurance costs, in 2019, Uber’s short-term insurance reserves totaled $941 million at the start of the year, or approximately 13% of cost of goods sold for the full year. Lyft’s insurance cost, inclusive of scooters and bikes, was 19% of cost of goods sold in 2019. For personal car insurance, Tesla’s rates are nearly 30% below average, as shown below.

Source: ARK Investment Management LLC, 2020; Data sourced from: How much does insurance cost on a Tesla?

With a vertically integrated network, Tesla should be able to offer attractive financing terms to prospective ride-hailing drivers, say $7,000 for down payments and the balance paid from a cut of driver earnings on the network. Coming off lease, used Model 3s could seed the network at launch. Moreover, Tesla should be able to finance its own vehicles, while Uber and Lyft pay fees – another layer of costs – to third party partners. While traditional auto loans are risky, Tesla will be able to disable ride-hailing vehicles, potentially retrieving them autonomously, if owners stop driving them on the network.

Higher Trade-In or Residual Values

If past is prologue, the trade-in or residual value of Tesla vehicles should be much higher than that for traditional ride-hailing vehicles. Tesla’s Model 3 has retained 94.5% of its value on average after one year, nearly 15 percentage points or 20% more than the 79.9% of other vehicles on average. Unlike most vehicles, Tesla’s performance improves with time thanks to over-the-air software updates and Autopilot. A Model 3 purchased in 2017, for example, can drive farther, faster, and more safely today than it did three years ago. As a result, Tesla’s ride-hailing drivers should benefit from a vehicle that not only improves in performance but also retains value relative to its counterparts over time.

Further, Tesla’s full self-driving package could offer drivers some “job protection” against automation. If Tesla does convert ride-hailing vehicles over-the-air into fully driverless cars, their owners should continue to earn income over time without driving, even if human drivers become obsolete. Then, former Tesla drivers would have invested in the equivalent of “autonomous taxi medallions” at bargain basement pricing, as shown below. Although traditional taxi medallions have come down from their million-dollar highs, they still are nearly three times the price of a Model 3 with a Full Self Driving Package option.

Note: Tesla prices are shown without subsidies. A TLC license is required to drive for Uber in New York City. The fee is $252 for a 3-year license and is not included in the chart above.

Source: ARK Investment Management LLC, 2020; Data sourced from: Need to Know: Taxi Medallions in New York; Tesla.com; Uber Fast Lane

Premium Prices

Moreover, Tesla could charge premium prices for its service, like an Uber Select or an Uber Plus which are $1-4 per mile more expensive than UberX, depending on the trip length and region, as shown below. Of course, Uber Select drivers also are completing UberX trips, so average take-home pay averages out closer to $1 more per mile. Premium priced services already in the market suggest customer segmentation possibilities, with higher take rates for luxury cars.

Source: ARK Investment Management LLC, 2020; Data sourced from: Uber.com; Lyft.com

Bottom line, Tesla’s ride-hailing service could spell disaster for Uber and Lyft. Already trading at roughly half their IPO prices, both are unprofitable today, even more so after the coronavirus crisis. If it were to launch its ride-hailing service within the next year, as fears of crowded subways and buses linger, Tesla could capitalize on pent-up demand, perhaps hiring former or current Uber and Lyft drivers, particularly given their respective decisions, both before and during the pandemic, to limit new driver applications. With better take home pay potential, not to mention biodefense mode, the Tesla ride-hailing network could offer a compelling value proposition to both drivers and customers as they emerge from the COVID-19 crisis.

*by Tasha Keeney, CFA, Analyst for ARK via SeekingAlpha*