One of the most visible big-name investors on Wall Street is Ark Invest CEO Cathie Wood. Wood invests in many areas of emerging technology including artificial intelligence (AI) and genomics.
But perhaps Wood's most bullish stance revolves around electric vehicle (EV) company Tesla (TSLA -12.12%). Wood has been a longtime supporter of Tesla's eccentric CEO Elon Musk who shares his vision of the company spanning beyond EV production.
Given the company's inroads with autonomous driving and robotics, Wood recently referred to Tesla as the biggest AI play in the world. To back up her claim, Wood's research suggests that Tesla stock could grow by another 777% over the next three to four years.
Let's dig into the state of Tesla's operation and assess if Wood's price target is feasible.
Tesla's incredible run
Since its initial public offering (IPO) in 2010, Tesla's stock price has risen over 14,000%.
While that makes Tesla one of the best-performing stocks in recent history, the chart above illustrates that the journey has been anything but linear. While Tesla has garnered its share of institutional support from the likes of Wood and mutual fund manager Ron Baron, the company is also a favorite among retail investors. A lot of that has to do with Musk's infatuation with meme culture and his large presence on social media.
Nevertheless, despite some controversies, Musk and his team have always found a way to deliver. As such, confidence in Tesla has gradually risen and the company is now one of the world's largest enterprises by market cap.
Given this stunning growth, Tesla stock has experienced periods of more pronounced buying activity and its valuation has become overextended. To mitigate some of this, Tesla has undergone two stock splits in the last four years -- once in 2020 and another in 2022.
While stock splits do not inherently change the value of a company, seasoned investors probably understand that more investors tend to buy in after these events occur. This is usually due to a psychological perception that the stock is cheaper given its now lower share price.
As of now, Tesla's split-adjusted stock price is around $228. But with so many AI catalysts on the horizon, could Wood's forecast of $2,000 per share be reasonable?
Image source: Getty Images.
What is behind Wood's assumptions?
The biggest drivers behind Wood's financial model are the number of cars Tesla will be able to produce in the future, as well as additional revenue streams for the business.
By 2027, Wood assumes that only 47% of Tesla's total revenue will be derived from EVs. This is because she believes that Tesla's progress in self-driving car technology will put it at the forefront of a new industry. More specifically, Wood believes Tesla is on the verge of launching a robotaxi fleet. The advent of robotaxis could significantly impact ride-hailing and delivery businesses alike as it represents a major cost-savings opportunity.
Furthermore, Ark's research suggests that the robotaxi business will carry much higher margins compared to Tesla's EVs given their recurring revenue. Should this be the case, Tesla could enjoy accelerated profitability and free cash flow -- which it can use to reinvest in more growth areas.
The combination of Tesla's rising EV production, industry-leading battery technology, and the potential of autonomous driving results in an estimated share price of $2,000 by 2027 in Wood's base case. Given Tesla's current share price, Wood is calling for a nearly 800% increase within the next few years.
Should you invest in Tesla stock?
Going off of Wood's forecast alone is not reason enough to believe Tesla stock has immense upside. While all eyes are on the company's self-driving capabilities, Tesla has other use cases for AI as well. Its humanoid robot, Optimus, could upend the labor market and warehouse operations.
To me, the biggest question marks revolve around when Tesla will begin commercializing these new products. Although investors occasionally get updates on Tesla's AI endeavors during earnings calls, it is not yet known how far away monetization is. These reasons make it obvious that Wood is assuming that a lot goes right for Tesla in a relatively short amount of time.
TSLA PE Ratio (Forward) data by YCharts
Tesla's forward price-to-earnings (P/E) multiple of 58 is the highest among its Magnificent Sevencohorts and it's not even close. I think this is a good indication that investors are broadly more bullish on Tesla's prospects relative to other megacap tech companies. This could signal that the potential of AI is already priced into Tesla's share price -- at least to some degree.
I've held Tesla stock for years and plan to continue doing so. While her research is interesting to read, I am not overly concerned about (or overly confident in) Wood's lofty price targets. For now, I'll treat share price forecasts as speculation and instead continue monitoring Tesla's operating results and AI roadmap. Overall, I think further gains are very much in store for Tesla shareholders, and I am excited to see how AI plays an integral role in the evolution of the business.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
As an enthusiast and expert in finance and technology, particularly in the realm of emerging technologies and investment strategies, I've closely followed the developments surrounding Ark Invest CEO Cathie Wood and her investment philosophy. Cathie Wood has emerged as a prominent figure in the investment world, known for her forward-thinking approach and bold predictions in areas such as artificial intelligence (AI), genomics, and electric vehicles (EVs).
Wood's bullish stance on Tesla, the EV company led by CEO Elon Musk, exemplifies her strategic foresight into disruptive technologies. Wood's research and investment strategies are grounded in comprehensive analyses of market trends, technological advancements, and company fundamentals.
In her evaluation of Tesla, Wood emphasizes several key factors:
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Tesla's Technological Innovation: Wood recognizes Tesla's innovations beyond electric vehicle production, highlighting its advancements in autonomous driving technology and robotics. She views Tesla as a significant player in the AI landscape, particularly with its developments in self-driving cars and the potential launch of a robotaxi fleet.
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Revenue Diversification: Wood's projections for Tesla's future revenue streams extend beyond electric vehicles. She anticipates substantial contributions from autonomous driving services, such as robotaxis, which could revolutionize transportation and create new revenue streams for Tesla.
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Financial Modeling: Wood's financial model for Tesla incorporates factors such as EV production estimates, margins from autonomous driving services, and potential profitability. Her projections aim to reflect the evolving landscape of transportation and technology while considering Tesla's competitive positioning.
Wood's forecast of a 777% growth in Tesla's stock price over the next three to four years is predicated on these factors and her confidence in Tesla's ability to capitalize on emerging opportunities in the AI-driven transportation sector.
However, it's important for investors to critically evaluate Wood's projections and consider potential risks and uncertainties. While Tesla has demonstrated remarkable growth and innovation, challenges such as regulatory hurdles, competitive pressures, and execution risks could impact its trajectory.
Ultimately, informed investment decisions require a nuanced understanding of the factors influencing companies like Tesla, as well as the broader economic and technological landscape.
Now, let's break down the concepts mentioned in the article:
- Cathie Wood: CEO of Ark Invest known for her bold investment strategies and focus on disruptive technologies.
- Ark Invest: Investment management firm specializing in thematic investing, particularly in areas like AI, genomics, and EVs.
- Tesla (TSLA): Electric vehicle company led by CEO Elon Musk, known for its innovative approach to transportation and technology.
- Elon Musk: CEO of Tesla and SpaceX, known for his visionary leadership and ambitious technological pursuits.
- Artificial Intelligence (AI): Field of computer science focused on developing systems that can perform tasks that typically require human intelligence.
- Genomics: Study of an organism's complete set of DNA, including genes and their functions, with applications in healthcare and biotechnology.
- Electric Vehicles (EVs): Vehicles powered by electric motors, using rechargeable batteries or fuel cells as energy sources, offering environmental benefits and energy efficiency.
- Autonomous Driving: Technology enabling vehicles to operate without human intervention, relying on sensors, cameras, and AI algorithms for navigation.
- Robotaxis: Autonomous vehicles deployed for ride-hailing services, offering potential cost savings and convenience compared to traditional transportation methods.
- Stock Splits: Corporate action dividing existing shares into multiple shares, often to lower the share price and increase liquidity.
- Revenue Streams: Different sources of income for a company, which may include product sales, services, licensing, and other sources of revenue.
- Financial Modeling: Process of creating mathematical representations of financial situations to forecast future performance and assess investment opportunities.
- Margins: Difference between revenue and the cost of goods sold, indicating profitability for a company.
- Market Cap: Total value of a company's outstanding shares, calculated by multiplying the current share price by the total number of shares outstanding.
- PE Ratio (Forward): Price-to-earnings ratio based on forecasted earnings per share, used to assess a company's valuation relative to its expected earnings.
- Monetization: Process of converting assets or activities into revenue-generating opportunities.
Understanding these concepts is essential for navigating discussions around investment opportunities, particularly in dynamic sectors such as technology and finance.
