Cathie Wood's Ark Invest has made a name for itself with bold bets on high-growth stocks. Wood ignores short-term volatility in her exchange-traded funds (ETFs) and invests in companies based on their long-term potential.
It's no secret she is very bullish on Tesla (TSLA -0.40%). The stock currently makes up 7.9% of Ark's total holdings, its biggest position. That includes a 10.8% weighting in the Ark Innovation ETF.
According to Ark's latest research, published in April, Wood expects Tesla to reach $2,000 per share by 2027. That's based on a weighted probability of different outcomes for revenue, profitability, and the stock's expected valuation. But even in Ark's bear-case scenario, the firm believes the stock could be worth $1,400.
These assumptions are ultimately rooted in Tesla's leadership in artificial intelligence (AI) and its data gathering to make its self-driving technology better than human drivers. As a result, Ark expects most of Tesla's profit to come from the robotaxi business by 2027.
Tesla stock has already doubled this year and is still trading 39% off its all-time high of $414 per share. If Wood's $2,000 target for the stock proves accurate, investors are looking at an eightfold return from its current share price of $252. Let's see what's baked into the firm's growth assumptions.
Bullish assumptions for Tesla's robotaxi rollout
Ark's future value estimate is largely dependent on Tesla hitting it big in robotaxis. CEO Elon Musk mentioned in the first-quarter 2022 earnings call that the company hoped to reach volume production of robotaxis by 2024. Consistent with that, Ark expects Tesla to start commercializing robotaxis most likely in 2024 or 2025.
Ark assigned a 22% probability that Tesla begins to commercialize its robotaxis in 2023, which is unlikely at this point. The firm puts a 33% probability that it will launch in 2024 and a 30% probability set for 2025.
According to Ark's analysis, Tesla could generate over $1 trillion in revenue by 2027 with 44% of that coming from robotaxis and 47% from electric vehicles (EVs). The rest would come from energy solutions (e.g., solar panels), human-driven ride-hailing services, and insurance.
Wood could be right about Tesla's long-term growth, but it's the timing that might be off. Musk's 2024 target seemed unrealistic because that only left two years to test and gain the necessary regulatory approvals. Momentum is building with two robotaxi companies winning approval in California recently, but there are still safety concerns that need to be addressed.
Moreover, Tesla still hasn't gathered enough data to make its autopilot capabilities better than human drivers. It is making rapid progress, but as of now, its Dojo training computer is not there yet. On the second-quarter earnings call, Musk admitted, "[M]y predictions about achieving full self-driving have been optimistic in the past."
I wouldn't buy the stock expecting Tesla to launch robotaxis in the next few years, thus sending its stock to the stratosphere. Still, I don't believe investors have to make such aggressive growth assumptions from new initiatives to justify buying the stock right now.
The Tesla Gigafactory in Texas. Image source: Tesla.
Here's why Tesla is worth buying
Musk previously called robotaxis a massive opportunity. The market for self-driving taxis is estimated to grow at a 91.8% annual rate from 2023 through 2030, according to MarketsandMarkets. It's going to be huge, and Tesla already has an enormous advantage to capture this opportunity.
The value for Tesla is that it has more cars on the road gathering data to make its Dojo training computer smarter than a human driver. In fact, these software capabilities are why Wood believes the stock could be undervalued right now.
As Wood sees it, Tesla is not necessarily a play on the growth in sales of EVs but a play on the growth of the company's autonomous-driving software. In her view, Tesla looks more like a potential software-as-a-service AI platform.
You don't have to take Wood's word for it. This comes straight from the CEO's mouth. On the last earnings call, Musk said Tesla is "very open to licensing our full self-driving (FSD) software and hardware to other car companies." He said his company is already in discussions with a major manufacturer about using the software.
Tesla has already demonstrated a record of increasing its profit margin from improvements to its EV manufacturing. By the time robotaxis are approved and ready for the road, the company should have even more efficiency and scale to roll them out in a timely manner. If it starts licensing its software, it will just pile more profit on top of the company's margins.
It seems that development delays or regulatory hurdles would be the only things stopping Tesla, and even then, investors could still be looking at a market-beating return on the stock. With an above-average price-to-sales ratio of 9.3, the stock is pricey. But that's expected for an industry-leading company that still has a long runway of growth from both existing businesses and new opportunities.
Considering Tesla's existing advantages, brand power, and future potential in software and robotaxis, the stock's long-term upside makes it worth holding at least a small position in a well-diversified portfolio.
