There's no denying that Tesla (TSLA 1.85%) gets exhaustive coverage in the financial and industry media. But CEO Elon Musk still thinks there's one area where his company isn't fully understood.
Musk hosted Tesla's annual shareholder meeting on Tuesday and did a live television interview after the meeting. During that interview, the dynamic CEO gave investors his vision of something that he thinks could catapult Tesla shares higher. Whether he is overly optimistic or not, investors should be paying attention.
The "ChatGPT moment"
Musk said he doesn't think investors see what Tesla's extensive artificial intelligence (AI) technology could do for the company. But he believes it will be this year or next when the company -- and the stock -- will get credit when Tesla has its "ChatGPT moment" that can significantly boost its results.
Musk believes Tesla is the true leader in AI, adding, "I'm not sure who is second, frankly." OpenAI's chatbot vaulted AI uses into the public's view late last year, and Musk sees a similar recognition of Tesla's use case. He told CNBC's David Faber, "I think Tesla will have sort of ChatGPT moment maybe if not this year, I'd say no later than next year."
That is the time frame he sees for a truly autonomous driving platform rolling out to Tesla vehicles. When that technology is ready, Musk said, "suddenly 3 million cars will be able to drive themselves with no one, and then 5 million cars, and then 10 million cars." And that could be extremely profitable for Tesla in several ways.
Software-like margins
Musk's vision is that the technology will allow Tesla owners to transform the utility and value of their vehicles. For example, a Tesla that would previously be parked most of the day could generate revenue as a driver-free taxi.
That revenue would be shared by the owner and Tesla. In his view, that would mean "instead of effectively having, say, 25% margins, it might be 70% or more, and I mean the free cash flow associated with that, it is actually truly a staggering amount."
This has long been the view of the most bullish Tesla investors, including Cathie Wood and Ron Baron. Wood recently said her price target for Tesla stock is an astounding $2,000 per share.
Caution is prudent
But Musk has been promising the rollout of Tesla robo-taxis for many years now, so investors have reason to be skeptical. Yet he seems to be focusing more of his time in that area now. Musk named a new CEO for Twitter this week, allowing him to concentrate more on the automaker. He said, "I'm going to be devoting a lot more time to Tesla, and especially on the AI development and new product development."
Based on his past promises going unfulfilled, investors shouldn't be buying Tesla shares solely for this reason, though. And it's understandable that some are concerned that the state of Tesla's business is in decline.
Lower vehicle prices amid growing competition hit Tesla's profit margin hard in the first quarter. But the announcement of a new CEO running Twitter and Musk's refocused attention on his EVs has some investors believing Tesla has hit an inflection point.
Reducing vehicle prices was a strategy to maintain market share rather than a result of sluggish demand. Musk noted that Tesla's most productive factory, in Shanghai, China, is still limited by its production rate, not by demand. In other words, the company is still selling every car it can make.
While Tesla stock remains expensive, with a price-to-earnings (P/E) ratio of around 50, vehicle production and sales will still grow significantly this year. Total production rose 44% year over year in the first quarter. That remains in line with the company's guidance for an average of 50% annual increases over the next several years.
An argument can be made that if one looks out several years, today's stock price isn't unreasonably expensive. But that requires a long-term view. If Musk is right and the company's AI-based use case will help generate even more low-cost revenue in coming years, the stock could indeed have a much longer runway for growth, too.
