One of the most visible big investors on Wall Street is the CEO of Ark Invest. Cathie Bois. Wood invests in many areas of emerging technologies, including artificial intelligence (AI) and genomics.
But perhaps Wood’s most optimistic stance concerns the electric vehicle (EV) business. You’re here (NASDAQ:TSLA). Wood is a longtime supporter of Tesla’s eccentric CEO Elon Musk, who shares his vision for the company beyond electric vehicle production.
Given the company’s advances in autonomous driving and robotics, Wood recently called Tesla a the biggest AI game in the world. To support his claim, Wood’s research suggests that Tesla shares could grow another 777% over the next three to four years.
Let’s take a look at the state of Tesla’s operations and assess whether Wood’s price target is achievable.
Tesla’s incredible journey
Since its initial public offering (IPO) in 2010, Tesla’s stock price has increased more than 14,000%.
While this makes Tesla one of the best-performing stocks in recent history, the chart above illustrates that the journey has been anything but linear. Although Tesla has gotten its share of institutional support from Wood and mutual fund manager Ron Baron, the company is also a favorite among retail investors. Much of this has to do with Musk’s fondness for meme culture and his large presence on social media.
However, despite some controversy, Musk and his team have always found a way to make it happen. Thus, trust in Tesla has gradually increased and the company is now one of the world’s largest companies in terms of market capitalization.
Given this astonishing growth, Tesla stock has seen periods of more pronounced buying activity and its valuation has become excessive. To alleviate some of this problem, Tesla has done two stock splits in the last four years: one in 2020 and another in 2022.
Although stock splits do not in themselves change a company’s value, seasoned investors probably understand that more investors tend to buy into them after these events occur. This is usually due to a psychological perception that the stock is cheaper given its now lower price.
Right now, Tesla’s split-adjusted stock price is around $228. But with so many AI catalysts on the horizon, could Wood’s $2,000 per share forecast be reasonable?
What is behind Wood’s hypotheses?
The main drivers of 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 company.
By 2027, Wood assumes that only 47% of Tesla’s total revenue will come from electric vehicles. Indeed, she believes Tesla’s advances in self-driving car technology will put it at the forefront of a new industry. Specifically, Wood believes Tesla is about to launch a fleet of robotaxis. The advent of robo-taxis could have a significant impact on transportation and delivery companies, as it represents a major cost-saving opportunity.
Furthermore, Ark’s research suggests that the robot taxi business will generate much higher margins than Tesla’s electric vehicles, given their recurring revenue. If that were the case, Tesla could benefit from accelerated profitability and free cash flow, which it could use to reinvest in more growth areas.
The combination of Tesla’s growing electric vehicle production, industry-leading battery technology and the potential of autonomous driving results in an estimated stock price of $2,000 by 2027 in the base case scenario of Wood. Given Tesla’s current stock price, Wood calls for an increase of nearly 800% over the next few years.
Should you invest in Tesla shares?
Deviating from Wood’s forecast alone is not reason enough to believe that Tesla stock has immense upside potential. While all eyes are on the company’s self-driving capabilities, Tesla also has other AI use cases. His humanoid robot, Optimus, could shake up the job market and the way warehouses operate.
For me, the biggest question marks are when Tesla will start marketing these new products. Although investors occasionally receive updates on Tesla’s AI efforts during earnings calls, it’s not yet clear how close to monetization is. These reasons make it clear that Wood assumes that a lot of things will go well for Tesla in a relatively short period of time.
Tesla’s forward price-to-earnings (P/E) multiple of 58 is the highest among its Magnificent Seven cohorts and it’s not even close. I think this is a good indication that investors are overall more optimistic about Tesla’s prospects compared to other large-cap tech companies. This could indicate that AI’s potential is already priced into Tesla’s stock price – at least to some extent.
I have owned Tesla stock for years and plan to continue doing so. While his research is interesting to read, I’m not too concerned (or too confident) about Wood’s high price targets. For now, I will treat stock price predictions as speculation and continue to monitor Tesla’s operating results and AI roadmap. Overall, I think further gains are in store for Tesla shareholders, and I look forward to seeing how AI plays a critical role in the company’s evolution.
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Cathie Wood Thinks This Magnificent Artificial Intelligence (AI) Stock Share Could Rise 777% was originally published by The Motley Fool
