When investors think about artificial intelligence (AI) stocks, semiconductor giant Nvidia is probably top of mind. AI data center chips are now responsible for the majority of the company's growth, and they have driven a whopping 238% surge in its stock price in 2023.
But when Cathie Wood thinks about the biggest opportunities in AI, a different stock tops her list. In an interview with Bloomberg TV, she said investors should be looking at AI software companies because they could generate $8 in revenue for every $1 in chips Nvidia sells.
With that in mind, Wood says Tesla (TSLA -2.00%) is currently the biggest AI play out there. You might know the company for its globally dominant electric vehicles or its eccentric CEO Elon Musk. But I'm going to explain why Wood -- and her investment firm Ark Investment Management -- predicts autonomous self-driving software is on track to become Tesla's most lucrative opportunity.
If Ark is right, Tesla stock could soar and catapult the company to one of the highest valuations in the world.
Image source: Tesla.
Electric vehicles are a pathway to bigger opportunities for Tesla
Tesla dominates the electric vehicle market. In fact, its Model Y was the best-selling car in the entire world during the first quarter of 2023, across all categories. By the end of 2023, Elon Musk estimates the company will have produced more than 1.8 million vehicles for the year, which would be its highest mark ever.
But Tesla is just getting started. Musk wants to grow production at a compound annual rate of 50% for the foreseeable future, and the company could be making 20 million cars annually by 2030 from 12 Gigafactories across the globe. Its production efficiency is unparalleled in the automotive industry as a whole, and it maintains the highest gross profit margin of any car manufacturer. It came in at 18.2% in the second quarter.
While it's still industry-leading, that margin is down compared to the same time last year because Tesla has reduced the pricing of its cars to spur demand in the current economic environment. Consumers are spending less money on big-ticket items like new cars due to elevated inflation and rising interest rates. But since Tesla is the only profitable pure-play electric vehicle manufacturer, it can afford to go to war with its competitors on price.
But there's another reason Tesla wants to slash prices and flood the market with cars. In an interview with CNBC's David Faber in May, Musk said the company could theoretically sell its cars at breakeven and still make substantial amounts of money. How? In the near future, each Tesla vehicle could serve as a vessel for the company's autonomous driving software, which is powered by artificial intelligence.
It has the potential to light a rocket under its gross profit margin because software can be developed once and sold an unlimited number of times.
Self-driving software could transform Tesla's economics
Ark Invest estimates there are more than 2.7 million Tesla customers testing the beta version of full self-driving (FSD) technology in the real world. That's 10 times more than its closest competitor, and Musk says those customers have traveled more than 300 million miles to date.
Tesla plans to make money from this software in three ways:
- First, Tesla will sell FSD to customers on a subscription basis. Since software products often carry a gross profit margin as high as 80%, it could be a major cash generator.
- Musk is exploring the possibility of licensing FSD technology to other car manufacturers for a fee. This will not only create a new revenue stream, but it could help drastically improve the software. The more cars using it in the real world, the more data it collects, and the smarter its AI models become.
- Finally, Musk wants to build an autonomous ride-hailing network, and this could be the most lucrative revenue stream in the company's history.
Musk says the average passenger vehicle is only in use 12 hours per week, which means it spends most of its time parked at the owner's home or workplace. FSD will enable that owner to loan their car to Tesla's autonomous ride-hailing network to generate extra income, from which Tesla will earn a cut.
Musk thinks a combination of software sales and autonomous ride-hailing could boost the gross margin from producing each Tesla vehicle to an unprecedented 70% in the long run. Therefore, even if Tesla made no margin from manufacturing and selling each car, the accompanying services would still make the company a cash-generating machine.
Ark Invest thinks Tesla stock could soar to $2,000 by 2027
Ark Invest predicts the autonomous ride-hailing industry alone will generate $4 trillion in revenue over the next five years. It's a bold call considering it's practically non-existent today, but Tesla says its FSD software could be publicly available by the end of 2023.
Ark has laid out some projections detailing how the new industry will change Tesla's business. While electric vehicle sales account for over 85% of the company's revenue today, they could shrink to less than half by 2027. That's because autonomous vehicles -- often referred to as robotaxis -- will represent 44% of revenue in Ark's financial models.
In 2027, Ark believes Tesla's total annual revenue will top $1 trillion, which would catapult its enterprise value to a whopping $6 trillion. That would translate to a stock price of $2,000, a mighty 716% increase from where it trades today.
Before investors get too excited, there is one caveat. Ark's projections imply Tesla will grow its revenue 78% per year between now and 2027. That would be an impressive feat for any company, but it would be an incredible one for a company already generating close $100 billion of revenue on a trailing-12-month basis. It's very possible Ark's expectations are a little too optimistic.
But it's unknown how quickly autonomous driving will scale. If it does evolve into a multitrillion-dollar industry in just a few years' time, then Ark's $2,000 prediction for Tesla stock might be on the money after all.
