Investors are betting big on stocks that can develop fully unsupervised self-driving technology.
There are still many questions about regulation, adoption, and how effective the tech will be.
Ultimately, the companies that can bring this tech to commercialization first will be big winners.
Investors have certainly taken an interest in companies working on unsupervised full self-driving (FSD) capabilities, since they could be on the precipice of a massive new industry. Early entrants into new markets can quickly take market share and grab attention, developing a first-mover advantage.
Several companies have built the technology for cars to drive themselves unsupervised, although we are not quite at the level of commercialization, which is where these autonomous vehicle companies will need to be if they want to turn hype into revenue. Two companies working on FSD technology are Pony AI(NASDAQ: PONY) and Tesla(NASDAQ: TSLA). Wall Street is torn on one of these stocks but says to buy the other because it could double from current levels.
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Tesla: The great battleground stock of 2025
Few companies have been more controversial this year than Tesla, largely due to the company's CEO, Elon Musk, who has turned off many customers and investors with his involvement in government affairs, particularly the Department of Government Efficiency (DOGE). Some believe Musk's politics have alienated customers and harmed the brand. Tesla's first-quarter deliveries of 337,000, the lowest level seen since 2022, haven't helped matters.
However, a big part of Tesla and its lofty valuation is the belief that the company can bring FSD technology to the masses. Its team of engineers has built the technology and has reportedly done testing with over 50,000 driverless miles. Investors are gearing up for a big demonstration in June in Austin, Texas, where residents will supposedly be able to ride in a self-driving Model Y.
On Tesla's first-quarter earnings call, chief financial officer Vaibhav Taneja called the company's FSD technology "safer than a human driver." Musk said he thinks FSD will be available for personal use soon: "So the acid test being ... can you go to sleep in your car and wait until your destination?And I'm confident that will be available in many cities in the U.S. by the end of this year."
Many are excited by these prospects, but analysts still seem torn on the stock. Over the last three months, 37 Wall Street analysts have issued research reports, with 16 saying to buy the stock, 10 saying to hold, and 11 recommending a sell, according to TipRanks. The average price target implies about 3% downside from current levels (as of April 30).
Musk's timeline on FSD seems ambitious, and I wouldn't be surprised to see a delay, but Tesla is still among a small group that is this far along in the process, which certainly deserves merit. However, much uncertainty remains about the future of FSD, including adoption and regulations.
I would also argue that the hype over FSD and Tesla's other future initiatives is already baked into the company's lofty valuation of 135 times forward earnings. That's why I'm more prone to stay on the sidelines.
Pony AI: The scrappy challenger
While Tesla has been around for some time and has a market cap of roughly $884 billion, Pony AI has seemingly emerged as a challenger, with a market cap of just over $3 billion. The company has been impressive lately and has seen its stock more than double since late April.
Pony AI took the autonomous driving world by storm when it unveiled its seventh-generation system at the Shanghai Auto Show, which clearly impressed investors. Management touted the safety of its new software, claiming that it is much safer than human drivers.
Pony's CEO, James Peng, also told the South China Morning Post that it has an advantage over competitors like Waymo because the tech is much more integrated. But perhaps the big kicker is that management said it could build its latest FSD system 70% cheaper than before.
His company also recently announced a new partnership with the massive Chinese tech company Tencent, which will help fast-track the path to commercialization. Through the partnership, Pony AI will leverage Tencent's super app, WeChat, and its online mapping technology.
It also doesn't hurt to have a juggernaut now essentially backing the company. While not as many Wall Street analysts cover Pony, at least three have issued research reports on the company since the end of last year.
On Dec. 22, 2024, Goldman Sachs(NYSE: GS) analyst Allen Chang initiated coverage of Pony with a buy rating and $19.60 price target.
On Dec. 23, 2024, Bank of America analyst Ming Hsun Lee initiated coverage with a buy rating and $18 price target.
On Jan. 14, 2025, Deutsche Bank analyst Bin Wang initiated coverage with a buy rating and $20 price target.
This implies that Pony's stock can double from current levels. Based on what we know, the company clearly seems like a leader in autonomous driving and is now on a path to commercialization, as well as a better path to profitability.
Pony AI is still somewhat risky, given it lost a significant amount of money in 2024, but the upside could be huge, so investors can, at the very least, take a small bite here.
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Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Goldman Sachs Group, Tencent, and Tesla. The Motley Fool has a disclosure policy.
