Ark Investment Management operates eight exchange-traded funds that invest in companies developing innovative technologies, including electric vehicles (EVs), robotics, and artificial intelligence (AI).
Ark's CEO, Cathie Wood, recently called Tesla (NASDAQ: TSLA) the biggest AI opportunity in the world because of its full self-driving (FSD) platform, which could create several new revenue streams for the EV giant. Wood and her team published a report last month suggesting Tesla stock could soar to $2,600 over the next five years, thanks mostly to FSD.
That would represent a whopping 1,110% upside from where the stock trades today. Surprisingly, Tesla CEO Elon Musk even came out and said hitting that target would be challenging. So, what are the chances Wood is right?
Image source: Tesla.
Tesla's core business is under serious pressure
Musk used to tell investors that Tesla could grow its EV business by 50% per year for the foreseeable future. But despite a record 2023 with over 1.8 million deliveries, that was only a 38% growth rate compared to its 2022 result. Now, two quarters into 2024, the company has delivered just 830,766 cars, which is down 6.5% compared to the year-ago period.
Musk abandoned all sales guidance during the second quarter (ended June 30), leaving investors to speculate that 2024 won't bring any growth at all. To make matters worse, Tesla has aggressively slashed prices to spur demand. It cut prices by an average of 25.1% in 2023 (according to Cox Automotive), and the EV industry, in general, saw a further 9.7% year-over-year price decline during the first quarter of this year.
That is crushing Tesla's coveted gross profit margin , which came in at just 14.6% (excluding regulatory credits) during Q2. It has been cut in half from just two years ago when it was regularly hovering above 30%. It's dealing a blow to the company's bottom line, with net income sinking 45% during Q2 to just $1.4 billion.
Tesla faces a number of headwinds. Demand for EVs , in general, appears to be softening, likely due to tough economic conditions led by high interest rates, and Tesla isn't the only manufacturer taking notice. Despite generating strong growth in EV sales in the recent quarter, both General Motors and Ford continue to pull back on planned production expansions.
On that note, competition is another threat to Tesla, and not just from legacy brands like General Motors and Ford. China-based BYD continues to churn out low-cost EVs, including the Seagull, which sells for under $10,000 in its domestic market and will soon make its way to Europe, where Tesla has a strong presence.
Tesla plans to deliver an affordable EV in the first half of next year, which could be priced at $25,000. Time will tell whether it will be enough to reignite sales growth.
Wood's forecast rests on the success of FSD
Musk spent most of his recent Q2 conference call with investors talking about Tesla's other opportunities, which include full self-driving and its Optimus humanoid robot. FSD is the key component of Ark's financial models, which suggest the technology will account for 63% of Tesla's total revenue by 2029.
Musk says FSD version 12.5 is now rolling out, which is based on an AI model with five times the parameters of version 12.4. In other words, it should be far more capable than its predecessor. Ark says Tesla customers have used the beta versions of full self-driving to navigate more than 1.3 billion miles in the real world so far.
Based on the data collected, Ark concludes that a Tesla vehicle running FSD is 16 times safer than the average car on American roads, with just one crash per 3,200 miles compared to one crash per 192 miles for human-driven vehicles. That will go a long way to convincing regulators to approve the wider release of FSD software.
Tesla could monetize full self-driving in three ways:
- It plans to sell the software to Tesla customers on a subscription basis (the beta version is already for sale).
- Tesla could license FSD to other automakers for a fee.
- Musk wants to build a ride-hailing network similar to Uber except without human drivers.
Subscription and licensing fees are conventional ways to earn revenue from software . But the ride-hailing aspect is what Ark is most excited about. Tesla's FSD-powered robotaxi is expected to be revealed on Oct. 10, and if it eventually clears regulatory hurdles, it could operate a ride-hailing service around the clock. In essence, that will allow Tesla to earn a slice of every mile driven with very few ongoing operating costs.
Ark's price target for Tesla stock might be overly optimistic
In order for Tesla stock to reach $2,600, Ark's financial models suggest the company will need to generate $1.2 trillion in annual revenue by 2029. Wall Street analysts think it will bring in $99.2 billion in revenue this year, so that figure will have to grow at a compound annual rate of 64.6% through 2029.
Considering the 2024 estimate represents just 2% year-over-year growth, Ark's models don't reflect reality at this stage.
Tesla also has a valuation issue. Based on the company's trailing 12-month earnings per share of $2.34 and its current stock price of $216, it trades at a price-to-earnings (P/E) ratio of 92.3. That is almost three times more expensive than the Nasdaq-100 index, which trades at a P/E ratio of 31.9. Keep in mind that Tesla's earnings are currently shrinking very quickly, so it's hard to justify the stock's premium valuation relative to its peers.
Of course, Tesla's current results mainly reflect its EV business alone. Ark's forecast basically relies on Tesla's robotaxi going from zero revenue today to a whopping $756 billion in annual revenue by 2029. It hasn't even launched yet, and at this stage, nobody knows for sure whether FSD will ever receive the blessing of regulators.
In my opinion, the odds of Tesla stock soaring 1,110% to $2,600 between now and 2029 are slim. I think it's a great company with an exciting future, but investors might want to wait on the sidelines until its stock trades at a P/E ratio that is more in line with the broader market.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BYD Company, Tesla, and Uber Technologies. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy .
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