Earnings season for the quarter ended March 31 is now in full swing, and the results from electric vehicle powerhouse Tesla (TSLA 4.96%) have been among the most anticipated, because many investors believe the company is at a critical juncture.
After absolutely dominating the electric vehicle industry in its first decade of operation, Tesla's competitors have started to catch up in both technology and sales. Plus, the industry is currently grappling with a tough economic climate as consumers face financial pressures caused by high inflation and rising interest rates.
As a result, Tesla has been slashing the prices of its vehicles this year, and investors have been waiting to assess just how much that would impact the company's financials. Well, they just found out, and Tesla stock sank 10% the day it reported its first-quarter results.
However, one firm on Wall Street just came out with its most bullish Tesla call ever. Ark Investment Management, which is led by top technology investor Cathie Wood, just increased its base-case price target on Tesla stock to $2,000 (from $1,533 previously). Here's why.
Tesla faces some short-term jitters
One of Tesla's best attributes -- and arguably the main reason its stock has often traded at a lofty premium to the broader market -- is its gross profit margin. But it took a notable hit in the first quarter of 2023, sinking from 29.1% to 19.3% year over year.
It's still much higher than all of its competitors, and Tesla remains the only major producer of electric vehicles turning a profit. The company's advanced technology extends to its manufacturing process, which is the most efficient in the industry, even drawing praise from its rivals in the past. Plus, since competition was scarce for such a long time, Tesla had pricing power that allowed it to make more money from the sale of each car.
But Tesla now faces a growing threat from a slew of electric vehicle upstarts, and also from legacy automakers like Ford Motor Company, which became the second-largest manufacturer in the U.S. in 2022 after selling 61,575 units. But that's about to grow substantially; estimates suggest by the end of 2023, Ford will be producing electric vehicles at an annual run rate of 360,000 units, and while that's far fewer than Tesla's 1.8 million, the gap is certainly closing.
Tesla still has the edge (for now) so it has the flexibility to reduce prices to pressure its competitors, and it has done so six times this year. It has worked, because Tesla grew sales in Q1 by 36% compared to the same time last year, with 422,875 vehicles going out the door.
Ark Invest is focused on a more valuable opportunity at Tesla
Tesla is one of the leading developers of artificial intelligence (AI), which will create a series of opportunities through its fully autonomous self-driving technology. Think of every Tesla vehicle sold as a potential customer for the software, which costs an additional $15,000. Software products typically have a gross margin of up to 80%, because they can be developed once and sold an unlimited number of times, so the majority of that revenue could flow straight to Tesla's bottom line.
Therefore, slashing vehicle prices to sell higher volumes makes a heap of sense, because the company is creating more future customers for its software.
Plus, Tesla is working on a self-driving robotaxi, which Ark predicts could become the most valuable piece of the entire business. These vehicles would not require any human intervention and could be the key to unlocking value from brand new industries like autonomous ride hailing, which Ark thinks could be a $14 trillion opportunity by 2027.
The company just shared the results of a series of simulations predicting when Tesla's robotaxi might be commercialized, and 2024 appears most likely, which is in line with the company's prior guidance.
Chart data: Ark Investment Management.
By 2027, Ark estimates Tesla will be generating $1.02 trillion in total annual revenue, 25% of which will come from its robotaxi segment. But since that business could be an incredible source of growth, Ark predicts it will make up 58% of Tesla's $6.1 trillion in enterprise value at that time.
Ark is betting on substantial gains in Tesla stock
There is no question Tesla will face short-term headwinds while its electric vehicle business navigates a more competitive landscape, which is one reason investors have sent its stock tumbling 60% from its all-time high. Its shrinking gross margin had a negative impact on its bottom-line results in Q1, with its earnings per share (profit) declining by 21% year over year.
Since earnings are the metric investors use to value most companies, it's difficult to make the case for short-term upside in Tesla stock. Based on its $3.85 in trailing-12-month earnings per share, it trades at a price to earnings (P/E) ratio of 42, which is already far more expensive than the 26.7 P/E of the Nasdaq-100 tech index.
But Ark is focused on the longer term. Tesla is more diversified than any other pure-play car maker, and if it unlocks as much value as Ark Invest predicts over the next few years in autonomous vehicles, its stock could soar 1,127% to the firm's price target of $2,000.
