Cathie Wood is the founder and chief investment officer of Ark Invest, which operates a family of exchange-traded and private funds. Each fund invests in innovative technologies like electric vehicles (EVs), robotics, space exploration, artificial intelligence (AI), and more.
Wood recently described Tesla (NASDAQ: TSLA) as the biggest AI opportunity in the world because of the introduction of its latest version of self-driving (FSD) technology, which could transform the company's economics. For the same reason, Ark also published a report in June that included a price target of $2,600 for Tesla stock by 2029.
That implies a 990% upside from where the stock trades today, which might be ambitious considering Tesla's EV sales are currently shrinking. In fact, even the company's chief executive officer, Elon Musk, thinks Ark's target will be tough to reach.
Image source: Tesla.
Tesla's core business is facing headwinds
Tesla delivered a record 1.8 million vehicles in 2023, a 38% increase from the prior year. The company declined to offer a deliveries forecast for this year, but some analysts expect the number to come in at 2.2 million. That would represent a decelerated growth rate of just 22%.
Musk previously told investors that Tesla could increase its EV production (and by extension, deliveries) by 50% per year for the foreseeable future, which no longer appears likely. Plus, Tesla's deliveries were down 6.5% in the first half of 2024 compared to the same period in 2023. That's despite the company slashing prices during the past year to support demand, which has crushed its automotive gross profit margin. It came in at just 14.6% in the second quarter, which is a long way from its 2021 peak of more than 30%. (I'll explain why that's important later.)
So why is Tesla struggling to sell cars? Demand for EVs in general appears to be softening. In Europe, sales plummeted 44% in August compared to the same month last year, with EV market share slipping to just 14% from 21% previously. Legacy carmakers like Ford and General Motors have slashed billions of dollars in planned investments in the segment during the past year, citing demand concerns.
Research by Goldman Sachs suggests consumers are concerned about a lack of rapid charging infrastructure and also about depreciation because used-EV prices are falling sharply. Plus, high interest rates around the world have pushed up borrowing costs, so many consumers in the market for a new car might be opting for cheaper gas-powered models.
Then there is the competition factor. China-based BYD, for example, is now selling one of its EV models for less than $10,000 in its domestic market (where Tesla has a big presence), and it could make its way to Europe in 2025. Tesla simply can't compete at that price point, but the company is working on a low-cost model that could sell for as little as $25,000. It's due for release next year, and Tesla is hoping its reputation as a premium brand will be enough to entice lower-income consumers.
FSD is the key to Wood's forecast
Tesla is a leading developer of autonomous driving software, and while that software isn't approved for wide use on U.S. roads, Ark's research suggests customers have driven 1.3 billion miles using beta versions of the technology so far. The latest version, 12.5 has fine times the parameters of version 12.4, so it should be the most capable iteration yet.
The company is expected to reveal a robotaxi called the Cybercab on Oct. 10. This is a key piece of Ark's $2,600 price target for Tesla stock. It will be powered entirely by FSD, paving the way for new revenue streams like autonomous ride-hailing (think Uber, but without a human driver).
Musk wants to build a ridesharing network wherein Cybercabs can earn revenue around the clock. Tesla customers who pay for FSD will also be able to lend their vehicles to the network when they're not using them, thereby earning additional income (which will be split with Tesla).
Ark believes Tesla will generate a whopping $1.2 trillion in revenue in 2029, with 63% ($756 billion) coming from the robotaxi platform. That doesn't include potential FSD licensing deals with other automakers, which appear to be in the works. That is incredibly ambitious because the company is on track to deliver just $98.9 billion in total revenue this year, which implies the company will need compound annual growth of 64.7% from now until 2029 to meet Ark's projections.
Remember, Musk himself previously forecast just 50% annual growth, and he isn't even hitting that target at the moment. In fact, in a post on social media platform X back in June, he said meeting Ark's forecast would be "extremely challenging."
Hitting Ark's price target by 2029 will be almost impossible
So Ark's revenue model might be a considerable stretch based on the facts at hand today. But I want to circle back to Tesla's shrinking gross profit margin, which I mentioned earlier, because it's driving a sharp decline in the company's earnings per share (EPS).
Tesla generated $0.42 in EPS in the second quarter of 2024, a decline of a whopping 46% year over year. The company's trailing-12-month EPS is $3.56, and based on its stock price of about $238 as of this writing, it trades at a price-to-earnings (P/E) ratio of 67.
That's more than double the 30.8 P/E ratio of the Nasdaq-100 index, implying Tesla is heavily overvalued relative to its big-tech peers. With Tesla's earnings rapidly shrinking, it's very hard to justify that premium valuation.
Investors might be paying up for the stock because of opportunities like FSD and the robotaxi, which, if Ark is correct, could eclipse Tesla's EV business in the coming years. But nobody knows when (or if) those technologies will receive regulatory approval, so their potential financial impact on the company isn't entirely relevant at the moment.
Therefore, I think it's very unlikely Tesla stock will soar 990% to reach $2,600 by 2029 based on the math. I have no doubt the company has an exciting future, but investors are exposing themselves to downside risk if they buy the stock at its current price.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BYD Company, Goldman Sachs Group, 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.
