Tesla Bets on Software and SpaceX Merger After Losing EV Crown

Tesla now derives recurring software income from 1.7 million active Full Self-Driving subscriptions, up 67 percent year on year, and more than 75 percent of new Teslas sold in North America carry the supervised FSD option. Those figures, disclosed at Wednesday's earnings briefing, frame a company pivoting from volume carmaking toward high-margin autonomy software after ceding the global EV sales crown to BYD last year.

The car business still generates 75 percent of Tesla's total revenue. Musk needs that cash cow to fund AI spending against rivals with far larger budgets. Yet his 2030 target of 20 million vehicles a year has been cut to 5 million, and even that looks ambitious: Tesla delivered only 1.6 million cars last year.

What does the software pivot promise?

Analysts see FSD as the near-term growth lever. "The biggest driver for demand is Full Self-Driving. And today, there's really no competitor for FSD in any car that you can buy," Musk told the earnings briefing, where Tesla also reported its largest car order backlog in four years.

Tesla has not disclosed FSD recurring revenue, a notable omission. The product costs $99 a month in the US, with different pricing elsewhere. Dan Ives, tech analyst and partner at merchant bank Yorkville Ives, called FSD already Tesla's highest-margin segment.

"Automakers are starting to look in the mirror and the software piece is what they are all looking at as the golden goose, because the margins are so high," Ives said. He argued that expanding FSD penetration from roughly 10-15 percent of the global customer base to about 50 percent would "transform the whole financial model" and contribute more than selling an extra 50,000-100,000 cars annually. "For every dollar of FSD revenue, the market rewards it 50-70 percent more than that dollar they would generate from selling an actual car," he said.

That thesis rests on a claim Tesla cannot yet cash. The fully autonomous version of FSD has won no regulatory approval anywhere.

Where do regulators stand?

Supervised FSD is approved in the Netherlands and several other European countries. Tesla seeks bloc-wide EU rollout through a member-state vote delayed until December. Volkswagen-backed Xpeng competes directly, working with German authorities and targeting EU approval for its XNGP rival once the bloc adopts autonomous driving regulations, expected early next year. "We aim to be one of the first," said Xpeng general counsel Zheng Yeqing.

Why a SpaceX merger?

Five days after the flying Roadster event powered by SpaceX compressed-gas thrusters, Musk revealed the two companies are exploring a merger. An integrated company, the argument runs, would accelerate research into materials, AI and manufacturing while cutting costs and improving access to critical parts such as chips.

"You're going to see the results of what happens when you have a collaboration with the world's best car company and the world's best rocket company," Musk said at the event.

William Blair analyst Jed Dorsheimer estimated the tie-up, if approved by shareholders and regulators, could give Musk control of 50 percent or more of the merged entity. One top 15 Tesla shareholder backed the deal, citing "all the AI-related innovations now happening at SpaceX."

Critics see concentrated risk. "I think Elon Musk is playing a dangerous game," said industry observer Max Willson. "My concern is that trouble in AI could spread across the group, putting otherwise strong businesses at risk. SpaceX's success should be protected, not used to bankroll an ever wider set of ambitions."

How are rivals responding?

General Motors hired former Tesla executive Sterling Anderson last year to develop a new generation of fully autonomous personal cars. BMW and Mercedes-Benz partner with Qualcomm and Nvidia on "Level 2 plus" systems requiring active driver monitoring. Volvo CEO Håkan Samuelsson conceded ground: "Tesla is probably leading the development in the west," he said, while claiming Volvo leads in software and will deliver "door-to-door automated" cars with Nvidia soon.

RBC's Tom Narayan called Tesla "a classic case of an innovator that disrupts and the other follows." With EVs converging on similar ranges and pricing, autonomy has become the industry's main battleground, and Tesla's December EU vote will be the first test of whether its software lead converts into revenue.