Tesla (TSLA 1.59%) underwent a 5-for-1 stock split in August 2020 and a 3-for-1 stock split in August 2022, a testament to its tremendous share-price appreciation in a very short time. The stock price skyrocketed 1,230% over the last five years, a rate of return that would have turned $10,000 into $132,000.
Stock splits themselves have little impact on a business, but the reason behind a split -- for substantial and sustained share-price appreciation -- can be an important signal for investors, as it often hints at solid fundamentals and strong growth prospects. Tesla bears will undoubtedly argue the company has neither, but Cathie Wood sees tremendous upside for Tesla.
Her innovation-focused asset management firm Ark Invest published a valuation model earlier this year that posits a bull-case price target of $2,500 per share by 2027. That implies roughly 860% upside for Tesla shareholders in a little more than four years. Is that realistic?
Tesla, the electric vehicle company
Tesla accounted for 20% of global battery electric-vehicle (BEV) sales year through July, putting it 5 percentage points ahead of the next competitor. But Tesla isn't only the market leader in BEV sales, but also one of the most profitable car companies of any kind. It reported the highest operating margin among volume automakers last year, something CEO Elon Musk attributes to superior manufacturing technology.
Investors can expect similar (or even greater) profitability in the future for three reasons. First, Tesla produces battery packs (the most expensive part of an electric car) at a lower cost per kilowatt hour than any other automaker, according to Cairn Energy Research Advisors. Analysts expect that advantage to last throughout the decade.
Second, Tesla plans to implement a new manufacturing process at Gigafactory Mexico (currently under construction) that could cut production costs in half, while reducing its factory footprint by 40%.
Third, CEO Elon Musk says gross profit margins could approach 70% as full self-driving (FSD) software and robotaxi services become major parts of the business. That would be a stunning increase from the 21.5%gross profit margin the company earned over the past year.
Tesla, the artificial intelligence company
Tesla is predominately an electric carmaker today but will pivot toward artificial intelligence (AI) software and services in the future, and its FSD platform will be the fulcrum of that transition. Tesla plans to monetize its autonomous-driving technology in three ways.
First, it will sell FSD subscriptions to drivers. Second, it will license FSD software to other automakers. Third, it will use its FSD software to power a fleet of robotaxis.
Building on that, Tesla is arguably a frontrunner in the autonomous-driving space. With millions of FSD-enabled vehicles on the road, the company sources data on a scale that easily eclipses that of every other automaker.
Indeed, Cathie Wood says Tesla has more autonomous driving data than every would-be competitor combined. That advantage hints at superior autonomous-driving technology, simply because training-data volume is directly correlated with AI model efficacy.
Here's the upshot: Tesla has a strong foothold in the electric car market, which is forecast to grow at 23% annually to reach $1.7 trillion by 2032. Tesla also has a strong foothold in the autonomous vehicle market, which is projected to grow at 35% annually to reach $2.4 trillion by 2032. Finally, Tesla plans to mass produce a robotaxi in 2024, entering a market that Ark Invest values at $9 trillionby 2030.
Ark Invest's valuation model
Ark Invest published a valuation model for Tesla earlier this year that uses a Monte Carlo simulation to consider a million different scenarios through 2027. To illustrate the range of possible outcomes, Ark condensed those scenarios into a bear case, a base case, and a bull case.
The bear case (the 25th percentile outcome) prices Tesla stock at $1,400 per share in 2027, implying a 438% upside. The base case (the average outcome) prices the stock at $2,000 per share in 2027, implying a 669% upside. And the bull case (the 75th-percentile outcome) prices the stock at $2,500 per share in 2027, implying an 860% upside.
The bear case: Ark assumes Tesla will earn roughly $769 billion in revenue in 2027, with electric vehicles accounting for 46%, robotaxi services accounting for 34%, and other sources (i.e., energy storage and insurance) accounting for 20% of that total. That implies annual revenue growth of 60% through 2027.
The base case: Ark assumes Tesla will earn $1 trillion in revenue in 2027, with electric vehicles accounting for 47%, robotaxi services accounting for 44%, and other sources accounting for 9% of the total. That implies annual revenue growth of 69% through 2027.
The bull case: Ark assumes Tesla will earn $1.2 trillion in revenue in 2027, with electric vehicles accounting for 48%, robotaxi services accounting for 49%, and other sources accounting for 3% of that total. That implies annual revenue growth of 76% through 2027.
Is Tesla stock worth buying?
I'll cut to the chase. I admire Cathie Wood and Ark Invest for providing open-source valuation models that offer so much detail. But the assumptions made by all three scenarios seem outlandish. I highly doubt Tesla shareholders will see returns between 438% and 860% by 2027.
That said, I do believe Tesla can successfully pivot into FSD software and robotaxi services, disrupting the transportation and mobility industries in the process. And with shares trading at 9.6x sales -- a discount to the five-year average of 11.2x sales -- I think patient investors with an appetite for risk can buy a small position in this growth stock today.
