Cathie Wood’s Ark Invest had an excellent first quarter. Its flagship Ark Innovation ETF (ARKK -0.53%) is up 25% so far in 2023, crushing the 7% return of the S&P500. Part of this ETF’s gain came from the strong performance of its largest position, You’re here (TSLA -1.12%).
While Tesla’s 56% gains so far in 2023 have helped this asset management firm perform well, Ark Invest actually sees monumental gains on the horizon for Tesla. Wood and his team estimate that Tesla’s stock price will hit $1,533 by 2026, implying a 697% upside from its current price.
Given this strong vote of confidence, is it stock of electric cars worth buying?
Tesla is the market leader in battery electric cars
Tesla missed its target for 50% annual growth in shipments last year, managing only 40% growth, as supply chain issues and temporary forced factory shutdowns put pressure on the company. production. The company also struggled with slowing demand for new vehicles caused by high inflation and rising interest rates.
But Tesla still leads the industry in battery electric vehicle sales with 18.2% market share, surpassing the second BYD more than five percentage points.
More importantly, the company posted strong financial results despite the many headwinds that weighed on its business. Full-year revenue increased 51% to $81.5 billion, and GAAP net income jumped 122% to $3.62 per diluted share. But investors should be particularly pleased with the 16.8% operating marginthe highest among automakers by volume, meaning Tesla is rounding up its peers in production efficiency.
CEO Elon Musk attributes this success to unparalleled manufacturing technology. Of course, this is somewhat subjective, but management expects to maintain its industry-leading operating margin in the coming years as new plants increase production capacity, 4680 battery cell reduces production costs, and full self-driving software (FSD) becomes a larger part of revenue.
Tesla plans to mass-produce robotaxis in 2024
Musk often describes Tesla as equal parts automaker and artificial intelligence (AI) company. It believes its vehicles are equipped with the most efficient in-vehicle supercomputer in the world, and Tesla objectively has far more Autopilot-equipped vehicles on the road than any other competitor. That means Tesla has more self-driving data than other automakers, and data is the lifeblood of AI.
Last year, Tesla made its FSD Beta software generally available to all customers in North America, and the company plans to mass-produce a robotaxi next year. This will bring Tesla one step closer to its goal of launching an autonomous transportation service. Management expects FSD technology to be its most important source of long-term profitability, and Ark’s valuation model relies on robots.
Ark’s Assessment Model
Ark expects Tesla to generate $843 billion in revenue by 2026, implying 79% annual growth over the next four years. That’s certainly optimistic, perhaps even wildly, and it implies a dramatic acceleration from the 51% growth Tesla achieved last year. But Ark believes that FSD technology will make this acceleration possible. Its valuation model assumes that autonomous transportation services will account for 34% of total revenue by 2026, or $286 billion. It also assumes that electric car sales will account for 57% of revenue, or $481 billion. The rest is expected to come from insurance and human transport services.
Is it possible? Maybe, but it’s very unlikely. I admire Ark’s transparency. Very few financial institutions provide detailed breakdowns of their price targets. But I wouldn’t bet the farm on Tesla stock climbing 697% over the next few years. That said, I believe the stock is worth buying for some investors.
Robotaxi Supporters Should Consider Buying Tesla Stock
Tesla shares are currently trading at 8.3 times sales, a very expensive valuation for an automaker. But that would be more reasonable for a software and services vendor, and Tesla is indeed moving towards software and services with its FSD platform. But investors should ask themselves if they think Tesla can disrupt the transportation and mobility industries with FSD software and robotaxi services.
Those who believe that the narrative should indeed buy some shares of this growth stock right now, but I would keep the position relatively small given the uncertainty surrounding the self-driving carpool industry.