Tesla (TSLA -1.11%) has been one of the hottest stocks of 2023 so far. The electric vehicle (EV) maker's shares have skyrocketed more than 120%. But that could be just the tip of the iceberg.
Cathie Wood's Ark Invest predicted in April that Tesla could trade at $2,000 per share by 2027. In Tesla's second-quarter earnings call in July, CEO Elon Musk stated that he "see[s] a path to a 10x" gain.
Ark Invest's price target implies a market cap of well over $6 trillion for Tesla. Musk's tenfold increase would mean a market cap of close to $9 trillion. Here are three reasons why both could be proved wrong.
1. Competition
There's no question that Tesla currently dominates the EV market. However, it's not a given that this will be the case over the long run.
Major automakers from all over the world are investing heavily in electric vehicles. Some of them just might out-innovate Tesla. For example, Toyota announced plans to launch vehicles powered by solid-state batteries within the next few years that will offer several advantages over Tesla's current EVs.
There are other alternative EVs as well. Toyota and BMW, among others, have also focused on hydrogen-powered vehicles. Toyota's Mirai, which is already on the market, has a range of up to 402 miles and can refuel in roughly five minutes.
Wood's thesis about Tesla centers largely on the company's opportunity in the robotaxi market. However, there's competition on that front too from companies including Alphabet's Waymo and GM's Cruise.
Tesla's robotaxi rivals use LIDAR as well as other types of sensors, whereas Tesla relies on vision technology. Musk claims that companies relying on LIDAR are "doomed." But it's at least possible that his adamant stance could be problematic over the long run.
2. Regulations
That leads us to the next potential roadblock. It's unlikely that Tesla will attain a market cap of anywhere close to $6 trillion without an explosion in the robotaxi market. But massive growth in this market could be impeded by regulations.
Safety is, understandably, the biggest concern for regulators. If they demand that self-driving taxis employ multiple types of sensors, including LIDAR, to improve safety, Tesla could be in trouble.
There's also another issue: It's unclear exactly who should regulate autonomous vehicles. The federal government typically watches over the safety and performance of vehicles. States issue driver's licenses and regulate insurance and liability. Cities establish their own local rules for using roads and licensing taxi services. Resolving jurisdictional matters could take more time than Ark Invest and others expect.
3. Macroeconomic factors
What if competitors and regulators don't slow Tesla down very much? Is a $6 trillion or more market cap easily attainable? Not necessarily. Macroeconomic factors could still get in the way.
Tesla stock isn't the most resilient during economic and market downturns. The EV maker's share price plunged much more during the COVID-19-fueled sell-off of early 2020 and the bear market woes of 2022 than the overall market did.
For Tesla to pull off the huge gains Wood and Musk envision, it will probably need a strong economy and a bull market. The company might not get what it needs.
Being wrong could be OK
I'm personally skeptical about Tesla's prospects of growing to a market cap of over $6 trillion by 2027 as Ark Invest predicts. My hunch is that Tesla won't have a path to 10x gains as Musk mentioned anytime soon, either.
However, those predictions could be wrong yet everything still be OK for Tesla and its investors. The stock doesn't have to grow by 10 or even five times over the next decade to be a big winner. Tesla could face increasing competition, regulatory challenges, and periods where macroeconomic factors are worrisome yet still come out on top.
