One of the most scrutinized companies on Wall Street is Elon Musk's Tesla (TSLA 5.77%). The company is a pioneer of the electric vehicle (EV) revolution and dominates the market both in the U.S. and overseas. However, despite the company's parabolic growth, many investors remain skeptical of Tesla's long-term potential.

But one investor who has remained a supported and bullish investor for many years is Ark Invest CEO Cathie Wood. The prominent growth investor recently sat down for a panel discussion on CNBC to speak about artificial intelligence (AI). Unsurprisingly, Tesla quickly became the focal point of the conversation. More specifically, Wood dove deep into Tesla's self-driving technology and explained why she believes this is one of the keys that will make Tesla the biggest AI play in the world.

Let's break down the current operating picture at Tesla and analyze how the company is investing in AI. Given the hype around AI and its potential, now could be an interesting opportunity to scoop up shares in an under-the-radar AI stock, as many investors still view Tesla as primarily a car manufacturer.

Cash flow is king

There are many important financial and operational metrics to look at when assessing the health of a business. However, sometimes the overall picture can be a little murky when taking financial statements at face value. This is because public companies report financials on a generally accepted accounting principles (GAAP) basis, which often does not present the most clear picture.

For example, if an investor wants to get an idea of a company's earnings power, looking at GAAP measures like net income could be misleading. One big reason for this is that companies often incur one-time expenses (perhaps related to an acquisition), or must book non-cash items like stock-based compensation, which can dramatically alter the reported profitability profile. For this reason, I prefer to look at free cash flow when assessing how robust profit generation is.

The table shows Tesla's free cash flow over the last five quarters.

Item Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023
Free cash flow $3,297 $1,420 $441 $1,005 $848

Data source: Tesla Q3 2023 investor presentation. Dollar amounts in millions. Table by author.

On the surface, the trend looks pretty bad. But it's important to take a step back and consider all the variables at play here.

For starters, like many other industries, the car market is not immune to macroeconomic forces such as inflation and high interest rates. To combat pullbacks in consumer spending, Tesla has resorted to a series of price reductions in an effort to gain momentum against the competition. And while the shrinking cash flow profile illustrated in the chart might make it seem like this was a poor choice, there are many reasons to believe the strategy is working.

I say that Tesla's price-cutting strategy is working because the company is still massively profitable on a per-unit basis. This means that for each EV that Tesla produces, the company still generates positive margin despite the price cuts and its direct impact on revenue deceleration. Considering that competitors such as Rivian and Ford are still losing billions of dollars on their respective EV businesses, it's clear Tesla has a huge competitive advantage when it comes to profitable production.

Even as Tesla's cash flow profile shrinks, investors should be encouraged that the company is still able to reinvest capital into other areas of the business -- something its rivals are struggling to keep up with. So, what other areas is Tesla investing in, and how can it impact the company?

People working on a car assembly line.

Image source: Getty Images.

Heavy investments in artificial intelligence (AI)

Perhaps the most lucrative area of Tesla is its autonomous driving technology. The company is developing its full self-driving (FSD) capabilities by leveraging machine learning and artificial intelligence (AI). To get a better sense of FSD, investors should understand the nuts and bolts of Tesla's EVs.

Tesla cars are equipped with a huge array of cameras and sensors that are constantly monitoring driver activity. This means that as you drive a Tesla, the car is capturing detailed images of roads, intersections, traffic patterns, stop signs, and more. Wood refers to these variables as "corner cases."

Given Tesla has millions of cars on the road, it's clear that the company is collecting driver data points at an unparalleled pace compared to the competition. Furthermore, this data is immediately fed into Tesla's homegrown supercomputer called Dojo, which serves as the nucleus to FSD.

While the prospects of a self-driving vehicle are interesting, investors might be wondering what the applications of the technology are and how big it can become. One of the bigger ideas behind autonomous driving is assembling a robo-taxi fleet. In theory, as Tesla vehicles collect more edge cases and uses the data to hone its FSD technology, there is a scenario in which autonomous driving becomes safer than human-controlled driving.

Although this sounds a bit far-fetched, many other companies are exploring the possibilities of robo-taxis. For example, Uber is working with Alphabet's self-driving subsidiary Waymo, as the company has an obvious cost-saving opportunity when it comes to its ride-hailing network.

The financial potential for autonomous driving is incredibly difficult to forecast, given it's not really commercially in use yet. However, Wood predicts that robo-taxis represent a $9 trillion revenue opportunity among the major players, while Morgan Stanley thinks that Dojo alone could fuel $500 billion of additional value to Tesla.

Is Tesla stock a buy?

For me, the biggest key here is the potential shift in Tesla's revenue. What I mean by that is in order for the masses to believe that Tesla is an AI business, the company is eventually going to need its revenue concentration to shift away from primarily EVs.

According to Wood, robo-taxis could account for over 40% of Tesla's revenue before 2030. Personally, I find that assumption to be the utmost of blue-sky forecasting. While I believe Tesla will one day reach $1 trillion in revenue, I remain suspicious that it will happen in the next few years. That said, I still believe in the company's long-term potential.

I've said before that Tesla represents much more than a car business. In addition to EVs, Tesla's tentacles touch lithium refining, solar panels, battery technology, robotics, and charging stations. For this reason, I think the stock is incredibly difficult to value.

Musk has built an energy and technology operation wrapped around an EV. But early signs are indicating that the future will hold much more.

Tesla is a growth stock and often trades with more pronounced levels of volatility compared to the broader markets. However, given some recent selling activity following a mixed Q3 earnings report, the stock is now trading 40% off its all-time highs.

From my stance, long-term investors should consider a position in Tesla if they have conviction in the company as an artificial intelligence (AI) opportunity. If you believe that Tesla is building more than an EV business and that its advancements in robotics and self-driving could help it emerge as a leader in AI, then I would say now is a unique opportunity to dollar-cost average into the stock.