Cathie Wood's Ark Invest had a great first quarter. Its flagship Ark Innovation ETF (ARKK 1.43%) is up 25% so far in 2023, crushing the 7% return of the S&P 500. Some of that ETF's gain came from the strong performance of its largest holding, Tesla (TSLA -3.40%).
While Tesla's 56% gains so far in 2023 helped this asset management firm perform well, Ark Invest actually sees monumental gains on the horizon for Tesla. Wood and her team estimate Tesla's share price will reach $1,533 by 2026, which implies 697% upside from its current price.
Given this strong vote of confidence, is this electric car stock worth buying?
Tesla is the market leader in battery electric cars
Tesla missed its target of 50% annual growth in deliveries last year, managing only 40% growth as supply chain problems and temporary forced factory closures put pressure on production. The company also battled softening demand for new vehicles brought on by high inflation and rising interest rates.
But Tesla still leads the industry in battery electric vehicle sales with 18.2% market share, outpacing runner-up BYD by more than five percentage points.
More importantly, the company reported solid financial results in spite of 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 about the 16.8% operating margin, the highest among volume carmakers, meaning Tesla is driving circles around its peers in terms of production efficiency.
CEO Elon Musk ascribes that success to unparalleled manufacturing technology. Of course, that is somewhat subjective, but management does expect to maintain its industry-leading operating margin in the years ahead as new factories expand production capacity, its 4680 battery cell reduces production costs, and full self-driving (FSD) software becomes a larger portion of revenue.
Tesla plans to mass produce robotaxis in 2024
Musk often describes Tesla as equal parts automaker and artificial intelligence (AI) company. He believes its vehicles are equipped with the most efficient in-car supercomputer in the world, and Tesla objectively has far more autopilot-enabled vehicles on the road than any peer. That means Tesla has more autonomous driving data than other automakers, and data is the cornerstone 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. That will move Tesla one step closer to its goal of launching an autonomous ride-hailing service. Management expects FSD technology to be its most important source of profitability in the long run, and Ark's valuation model hinges on robotaxis.
Ark's valuation model
Ark expects Tesla to generate $843 billion in revenue by 2026, which implies 79% annual growth over the next four years. That is certainly optimistic, perhaps even wildly so, and it implies a dramatic acceleration from the 51% growth Tesla achieved last year. But Ark believes FSD technology will make that acceleration possible. Its valuation model assumes autonomous ride-hailing services will account for 34% of total revenue by 2026, or $286 billion. It also assumes electric car sales will account for 57% of revenue, or $481 billion. The remainder is projected to come from insurance and human-driven ride-hailing services.
Is that possible? Perhaps, but it is highly unlikely. I admire Ark's transparency. Very few financial institutions provide detailed breakdowns of their price targets. But I would not bet the farm on Tesla stock soaring 697% over the next few years. That said, I do believe the stock is worth buying for some investors.
Robotaxi believers should consider buying Tesla stock
Shares of Tesla currently trade at 8.3 times sales, a very expensive valuation for an automaker. But it would be more reasonable for a software and services vendor, and Tesla is indeed moving toward software and services with its FSD platform. But investors must ask themselves if they believe Tesla can disrupt the transportation and mobility industries with FSD software and robotaxi services.
Those who believe that narrative should indeed buy a few shares of this growth stock right now, but I would keep the position relatively small given the uncertainty surrounding the autonomous ride-hailing industry.
