Cloud Hosting

Tesla (TSLA 0.66%) kicked off third-quarter earnings season a few weeks ago. CEO Elon Musk spent most of the earnings call speaking about the company's exploration of artificial intelligence (AI) and supercomputing.

However, it seems like Wall Street analysts were more concerned with the company's financial health than his comments. The combination of rising interest rates, inflation, and aggressive price cuts have indeed led to meaningful deterioration in Tesla's margins and overall profitability.

Following the report, Tesla stock has fallen 15% as of this writing, but this could be a rare opportunity to buy the dip in Tesla stock. While the near and medium-term picture still looks a little stormy, the long-term thesis continues to play out for Tesla, and very few people seem to be talking about it.

Prior to the earnings report, Morgan Stanley released an investor note that focused on Tesla's AI capabilities. More specifically, the research report suggests that Tesla's supercomputing technology, dubbed Dojo, could add $500 billion of enterprise value to the company. And it's this lesser known aspect of Tesla's business that makes the stock such a compelling buying opportunity right now.

As it stands today, Tesla's biggest source of revenue comes from selling its electric vehicles. And yet, unlike other automobile manufacturers, Tesla stock trades much more like a tech company than a car company. The underlying reason for this disparity between Tesla and its peers is due to the heavy investments in AI the company is making.

One of the biggest initiatives at Tesla is its autonomous driving vision, called full self-driving (FSD). At the heart of FSD is Dojo. But what is Dojo, exactly?

Image source: Getty Images.

Dojo is Tesla's supercomputer. The cameras in Tesla's vehicles are constantly capturing loads of data from the road. In turn, this data is fed back into Tesla's core architecture (or neural network) and processed by a series of graphics processing units.

As more data is collected, the smarter this network becomes. This is a classic example of machine learning. In this case, the machine is the Tesla vehicle, and its objective is to get to a point where the car itself has the ability to recognize images on the road and mimic the behavior of a human driver. Dojo gives Tesla the ability to create software from the data it's collecting that can be integrated into its vehicles and give riders the option to have the car drive itself.

While aself-driving car sounds like something out of a science fiction novel, there are many companies working on this technology. Musk posted the video below earlier this year to show just how far Tesla's FSD technology has come:

https://t.co/VzTxpktH1q

So how does Morgan Stanley see Dojo opening the door to several hundred billion dollars of additional value for Tesla?

Well, should FSD prove to be the market leader in autonomous driving technology, Tesla could (in theory) begin to license the software Dojo is creating. If this happens, Tesla's valuation becomes a lot more interesting because the company is effectively evolving from a car manufacturer to a software business. Valuing the stock like a high-margin software-as-a-service (SaaS) business doesn't seem overly far-fetched in such a scenario.

One of the most obvious use cases for autonomous driving is creating a robotaxi fleet with beneficiaries that include ride-hailing companies Uber and Lyft. In fact, Uber has already partnered with Waymo, the self-driving subsidiary of Alphabet. To understand how big this market could be, consider that Ark Invest CEO Cathie Wood estimates robotaxis could generate $9 trillion of revenue within the next decade.

That said, it's too early to tell how accurate Wood's outlook will prove to be. While companies like Tesla continue to invest significant capital into these AI-powered projects, autonomous vehicles are not yet commercially available. It's hard to ignore the progress Tesla is making, though, and given the potential size of this market, there will likely be multiple winners in this space.

The popularity of Tesla's electric vehicles means Dojo is likely ahead of the curve in developing self-driving software, and any lead the company has in licensing its software to other auto manufacturers would likely allow it establish a dominant market share position, even with the threat of Alphabet looming. This dynamic is what many investors are ultimately banking on.

Although the full potential of Dojo is still years away, Musk firmly believes Tesla's advancements in AI could make it the most valuable company in the world. Given the sell-off after its latest earnings, Tesla stock looks attractive. Investors should take advantage of the depressed stock price right now and stay focused on the long-term AI opportunity.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Adam Spatacco has positions in Alphabet and Tesla. The Motley Fool has positions in and recommends Alphabet, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.

Read the original:

Wall Street Thinks Tesla Has a $500 Billion Artificial Intelligence (AI ... - The Motley Fool