Investors have long debated whether Tesla is an auto company or a tech company. We believe it's both, but see the biggest value driver from here being software and services revenue. The same forces that have driven AWS to reach 70% of AMZN total EBIT can work at Tesla, in our view, opening up new addressable markets that extend well beyond selling vehicles at a fixed price. The catalyst? Dojo, Tesla's custom supercomputing effort in the works for the past 5 years. Version 12 of Tesla's full self driving system (OTA by year-end) and Tesla's next AI day (early 2024) are worth watching.

What is Dojo? Dojo is a purpose-built supercomputer designed in-house by Tesla to train the full-self-driving (FSD) system that sits inside every Tesla vehicle. Why is Tesla doing it? Tesla's cars are sensor encrusted robots making life and death decisions in highly unpredictable environments and driving situations. Tesla's ability to improve the efficacy of its full self driving system is limited by the ability to collect and process real world video data from the edge and to train these robots from the experience of its vehicle fleet in service, which is 5mm units today and closer to 50mm by end of decade. Tesla management has said it needs as much compute power/NVIDIA GPU clusters it can get its hands on and currently it cannot physically secure the amount of chips necessary to train cars. In addition, they believe they can develop a more efficient system for their specific needs while not funding a supplier's 60% gross margin.

With a highly experienced semiconductor team, Tesla has built a custom AI ASIC chip, that, due to its core function of processing vision-based data for autonomous driving use cases, can operate more efficiently (energy consumption, latency) than the leading cutting-edge general-purpose chips on the market (NVIDIA's A100s and H100s), and at a fraction of the cost. Dojo is a training computer made up of many thousands of D1 chips housed in an AI data center. It trains the inference engine (FSD chip) that sits within the vehicles at the edge which Tesla has designed in-house for the past 7 years

Stretching your thinking. Could success in vehicle autonomy enable Tesla to become Go-To provider for visual data processing across other adjacent markets? Although Dojo is still early in its development, we believe that its applications long-term can extend beyond the auto industry. Dojo is designed to process visual data which can lay the foundation for vision-based AI models such as robotics, healthcare and security. In our view, once Tesla makes headway on autonomy and software, third party Dojo services can offer investors the next leg of Tesla's growth story.