Fantastic News for Tesla Stock Investors!

Tesla (TSLA -5.92%) has significantly lagged broader equities this year, partly because its core electric vehicle (EV) business has faced headwinds. However, the company is working on projects that could substantially improve its financial results. One of them is its humanoid robot, which CEO Elon Musk claimed will be the “biggest product ever.” The other is Tesla’s robotaxi fleet, which, once it scales, could transform Tesla’s business for the better.

The company has made progress on both fronts recently, and it even achieved an important milestone within its robotaxi business that investors should take note of.

Tesla’s robotaxi plans take a leap forward

Tesla first launched its robotaxi service in Austin in June of last year. Since then, it has expanded it to several other cities across the U.S. The company has used its Model Y, running on its Full Self-Driving (FSD) software, in its robotaxi service. However, it was always Tesla’s plan to launch a purpose-built vehicle specifically for its robotaxi business. Mission accomplished. On Sept. 3, Tesla debuted the Cybercab in Austin. The Cybercab is a dedicated, autonomous electric vehicle that could become the backbone of Tesla’s robotaxi fleet.

What is the advantage of the Cybercab? It is a two-seater (most ride-hailing trips involve one or two passengers, according to some research) with no steering wheel, no side mirrors, and no pedals. A smaller, more compact, and relatively simpler design that eliminates many of the features needed to make human driving possible likely means it is cheaper to manufacture. Translation: Instead of mass-producing Model Ys for its robotaxi service, relying on the Cybercab will help keep costs in check.

Is this the start of a sustained run?

Tesla stock initially jumped in anticipation of the Cybercab launch. It’s not hard to understand why. The company’s core electric vehicle (EV) business has been mixed over the past couple of years. Recent second-quarter results were strong, but that was largely due to increased demand for EVs amid geopolitical tensions that drove oil prices higher.

That’s hardly something Tesla can count on for sustained EV demand over the medium term. In all likelihood, demand will cool down as oil prices stabilize. But here’s the interesting part.

The market has long ceased to treat Tesla as just an EV company. Tesla’s robotaxi service has the potential to make the business far more profitable. True, Tesla has to spend a small fortune now to produce enough cars to put on the road and to train its FSD software to achieve increasingly better performance.

But once the fleet of robotaxis is large enough, the FSD software continues to improve, and the service achieves significant utilization, we could see revenue soar, costs and expenses decline as a percentage of the top line, and margins and profits increase significantly.

Tesla’s recent launch of the Cybercab was an important step toward that goal. But again, all of this only works if Tesla can become a leader in the robotaxi industry, and although it has made significant headway, there are reasons to be skeptical.

First, Waymo, one of Tesla’s biggest competitors, has a far larger fleet of robotaxis on the road. This isn’t just about raw numbers. A larger fleet means a stronger data flywheel to train a self-driving software. True, Tesla also has non-robotaxi models that rely on its FSD software, but it’s worth highlighting Waymo’s lead in the robotaxi market. Second, there are still significant potential regulatory risks to consider.

A single accident with the company’s robotaxi fleet will attract significant regulatory scrutiny. In fact, the U.S. government recently opened an investigation into Tesla’s Cybercab shortly after it launched. Regulators want to ensure that the self-driving vehicle meets safety standards. Tesla’s CEO, Elon Musk, noted that Tesla’s robotaxi fleet has never been involved in a serious fatal accident.

But it’s worth factoring that possibility into our analysis, especially once we consider valuation. Tesla is trading at 156.3x forward earnings. At current levels, even the hint of trouble with the robotaxi service — since it is one of the core reasons why Tesla trades at a significant premium — could send the stock plunging.

Case in point: Tesla’s shares dropped after the Cybercab launched, erasing pre-launch gains, because some investors and analysts were disappointed with the new product, not to mention the regulatory concerns it now faces. Tesla’s Cybercab milestone is still great news for shareholders, but the stock will remain volatile moving forward. Only investors comfortable with significant risk should consider initiating a position.