Tesla will be 'the best AI play of the next decade', Kevin Paffrath explains

Kevin Paffrath, Financial Analyst and "Meet Kevin" YouTube Host, joins Yahoo Finance Live to discuss Tesla's shareholder meeting, Tesla advertising, how Tesla's AI integration will impact the company's profitability, and the Tesla Cybertruck.

Video transcript

- Well, Tesla is reversing course, CEO Elon musk telling investors Tuesday the EV maker plans to start paying for ads to sell cars. That marks an about-face for a company that's long resisted traditional marketing. It's one of many headlines coming out of Tesla's annual shareholder meeting in Austin. For more on what we learned from Tesla, let's bring in Kevin Paffrath, financial analyst and Youtuber. Meet Kevin.

Kevin, good to talk to you today. You know, it's interesting the way that Elon musk kind of framed this, saying look, I wasn't into advertising until I bought a company that was highly reliant on ads. But the fact that Tesla is now giving this a second look, does that point to some of the challenges they're seeing in the market as it gets more and more crowded, and we start to see more price cuts?

KEVIN PAFFRATH: Absolutely. And first of all, thank you so much for having me.

Tesla is the largest position in my ETF, so when I was at the shareholder meeting yesterday I'm like, "Come on, Elon!" I'm trying to grab him by the shoulders and shake him. You can't just keep cutting prices, because if you cut prices of the vehicles, the reality is mainstream folks don't necessarily know about these new prices, and so, you have to advertise. And this analogy that I made at the shareholder meeting was that if-- they dropped the price of a vehicle $7,000-- if instead they dropped the price maybe $6,500, took $500 and threw it into advertising for every vehicle they produced, that'd be nearly half of Netflix's annual advertising budget of about $1 billion. If they just took $1,000 instead of doing price cuts and did ads, now they can talk about the features with the amount of money that Netflix spends on advertising.

So simply put, they can spend billions of dollars in advertising with a very little portion of pricing remaining in the vehicles. And now we can talk about how Elon will take a five-year-old car and provide it software updates to make the airbags safer, the restraint system safer, to make the braking system safer. These cars are becoming more valuable over time rather than less like most cars, but nobody knows. Nobody knows the pricing of them, these updates, these features these cars get. And people think it's a luxury or very expensive vehicle, when people don't realize you could buy a Model 3 right now for 36,000 bucks after a tax credit and get all of these features.

So taking a small bit of money in advertising would be a huge game-changer for Tesla.

- Kevin, what do you think about just the demand picture right now? I know obviously you're a big shareholder, but when it comes to some of the words that we got out from Musk yesterday, saying that Tesla is not immune to the global environment right now; what do you think that then looks like, at least in the near term?

KEVIN PAFFRATH: I think that was a good forecast from Elon that you should expect some rockiness in the stock over the next 6 to 12 months. Of course, if the federal reserve begins to slowly indicate, maybe come summer or September, that they're going to begin reducing rates, I think the stock market will slowly start pricing that in and rise even more.

So I don't know that we're ready to make a new bottom, but I also don't know that we're ready to break any kind of new highs anytime soon. So Elon's probably right with his warning, wait the next 12 months.

The beautiful thing though about Tesla is, in my opinion, now you have an extended opportunity to increase your exposure to it. And I think it's actually the best and most overlooked AI play that exists. Everybody's looking for AI stocks and they're looking at companies like Google. And Google, by creating AI or integrating AI, is putting at risk 69% of all of their advertising revenue. So while they might gain some revenue in integrating AI, they're losing elsewhere. Where when you look at Tesla, the more they integrate AI the more profitable they become.

This is a company that could actually make a substantial amount of pure profit from artificial intelligence. Elon himself suggests that their margins could be zero on the car and 100% from artificial intelligence. We don't even have to consider robotaxis or the Optimus robot in the future. Just the full self-driving features itself, with people sitting in the vehicle, those margins could make this an extremely profitable company, more so than it already is. Yet now people are scrambling thinking, "I'm going to invest in Microsoft or Google or Facebook because they mention AI." It's ludicrous. Tesla is the best AI play of the next decade, followed by the chip companies. The danger of course is the chip companies become commodities, where Tesla maintains true pricing power.

- You know a lot of investors ears just perk up there, right? We hear "AI" and then say, "Where can I invest in?" You're saying Tesla is the big place to put your money.

I'm curious to hear your take on the Cybertruck. Elon Musk has said look, we want to start production by the end of the year. The numbers he put out, though, 250000 to 500000 units a year, that he thinks Tesla can deliver on, it appears to be a little more of a conservative estimate. Is that realistic, do you think?

KEVIN PAFFRATH: It's probably still a little optimistic. I know I sound like a real Tesla optimist, but I call myself more of a patient Tesla optimist in that I honestly think when they say they're going to have a Cybertruck delivery event this year, they are doing everything in their power to deliver one car by December 31, so at least they can meet that promise.

And I think the ramp for this vehicle is going to be very extended. That's because we're building the vehicle completely differently. We're building it from the outside in rather than the inside out. In other words, there isn't a traditional steel frame inside the car. The outside of the car is the frame. It's a totally different way of manufacturing.

So I think a lot of patients should be kept sort of in mind for the Cybertruck, and I really wouldn't start trying to model out the Cybertruck as being even that ambitious of a target probably until 2025. I wouldn't be expecting a Roadster until 2030 or beyond.

So I think patience will be very important for Tesla, but as an AI play, I think people who realize that AI potential and eventually these new products are going to be very well rewarded.

- So Kevin, Musk naming a new CEO of Twitter, also saying that he's not going anywhere as the chief executive of Tesla. I have a feeling about what you might say to this, but how big of a win do you think that is for Tesla here at this point?

KEVIN PAFFRATH: It's huge. Look, for the car company itself, it's probably not that big of a deal, much like a Tim Cook could step in for Steve Jobs; the roadmap had been set for the next four or five years. Not to take any credit away from Tim Cook; I think he's great.

I do think that Elon can walk away and let the auto division run. But what Ellen's useful for is actually the next level, that AI, integrating the Optimus and getting to the next level of AI in full self-driving. That's where he is key. I think he can tie this vision together and guide the engineers in the right places to make sure we get what's practical and functional, in his words, quote-unquote, "for humanity."

And so I think he is mission-critical for that. For just the car company, he could walk away from that and I think Tesla would be just fine. But hearing that he's staying, absolute win, again, for the AI play.

Now, they just need to advertise it. And I think they should hire Ryan Reynolds. His ads for Mint Mobile, that's the person we need pitching this. Deadpool, bring him in!

- You want Ryan Reynolds to pitch Tesla? Is that your pitch here?

KEVIN PAFFRATH: Absolutely. He is-- I love Ryan Reynolds. I don't know anybody who doesn't love Ryan Reynolds. And I think--

- He's a likeable guy.

KEVIN PAFFRATH: --the way he can convey information-- Well not only that, but Elon wants valuable, information-rich ads; Ryan Reynolds can do that. "Hey, it's Ryan Reynolds here. Did you know the lifetime ownership of a Tesla, the costs are lower than that of a Corolla? Holy--" And then maybe some expletives with some bleeps, you know, in his style, and some comedy; it would do amazingly well.

- I have a feeling you've already mapped all this out. Kevin Paffrath, good to talk to you today. I appreciate your time.

KEVIN PAFFRATH: Thanks for having me.